The Rise of Falling DTE

The rise of the modern options market is almost half a century old, and the data-driven, exchange-traded world we now live in, can perhaps be dated back to the self-referential moment that came with the CBOE’s introduction of VIX as an index in 1992.?

As markets evolve, the market microstructure is shaped by what its participants seek to trade. It has taken five decades for exchanges to grasp that trader interest is inversely proportional to DTE fully but now that they have – with regulators finally greenlighting – they are vying to outdo each other with more frequent expiries.?

It started with the introduction of weekly index options in the US in 2005 but the trend did not really pick up till 2012, when Taiwan introduced them in their benchmark TAIEX index.?

Their uptake took a while but the volume chart over the years told the story of trader preferences.?

Commodities markets took notice in late 2013 when gold and crude oil weeklies were launched. Japan followed with Nikkei 225 weeklies in 2015, while in the US, VIX weeklies began trading in 2015, followed closely by bi- and tri-weeklies with the advent of Wednesday and Monday options in 2016.?

India took the plunge with BankNifty weeklies in 2016, followed by Nifty weeklies in 2019. Korea, one of the most liquid options markets in the world, was a laggard when it launched KOSPI200 weeklies as late as 2019.?

Finally, we have come to the era of daily options, beginning with their launch in SPX in 2022. India has started to move in this direction by spreading out the expiry days among different indices and exchanges – an exciting strategy for the Indian derivatives market. There is a fundamental reason why more expiries are attractive, and it is the way institutional or sophisticated trading firms approach their strategies.??

As Roni Israelov, chief investment officer at wealth management firm NDVR and a former manager of options strategies at AQR said to FT recently:? ? “If I have monthly options, I get 12 independent bets per year. If I have weekly I get 52 bets per year. Daily gives me 252. If you’re generating trading strategies, the ability to have more ‘at bats’ and more diversification by taking more independent trades can be helpful.”?

More bets equal more diversification, which equals tighter margins (lower IV premia over HV).??