Since the advent of COVID-19-related lockdowns, individual investors have started trading in short-term options at an unprecedented rate—with approximately 46 million contracts trading each day in the past year. These options, known as 0DTE (zero days to expiration), expire in 24 hours or less. With the widespread advent of commission-free trading, a surge of investors (particularly Millennials and Gen X), have entered the short-term trading fray—taking on large risks in the process. Many of these investors see 0DTE options as gambling rather than investments, but gambling and investment risks are not treated identically by individuals. For this reason, it is important for Financial Professionals (FPs) to understand how, from a client’s perspective, gambling in financial markets is different from investing in them. There are specific behavioral biases that can become more prominent with gambling risk (versus investment risk) and remaining oblivious to these behaviors will only hurt clients. While not every client may be interested in the topic or trading of short-term options, the biases and behavioral finance insights discussed are relevant for any clients who may view investing as similar to gambling.
The realm of short-term options trading is vast and multifaceted. The intricacies and nuances of this topic make it worth revisiting despite one's acumen. The aim of this post isn't to oversimplify or reiterate what many FPs already know, but rather to provide a comprehensive overview, perhaps shedding light on some aspects that might not be regularly encountered in day-to-day advisory roles. This section will serve as a refresher for those already well-versed in short-term options trading, and as an introduction for FPs newer to the field or those who have not been exposed to 0DTE options.
Options are contracts that give holders the option to buy or sell shares of an underlying asset at a specified price and time. Options are financial derivatives—they hold no value on their own, but rather derive their value from the underlying asset to which the contract is tied. Options can be based on stocks, indexes, debt/credit instruments, or foreign currency. Options trading is not new or revolutionary—standardized options contracts were introduced by the Chicago Board Options Exchange (CBOE) in 1973. However, options trading has grown both more popular and more complex since then, with new option types and derivatives being introduced as financial markets evolve.
Generally, options allow, but do not obligate, a holder to buy or sell an underlying asset at a preset price (the strike price) by a specified time (the expiration date). Investors can purchase options for a premium (e.g.,$5 per share)—this is what they pay regardless of whether they exercise the option. There are two general types of options: call and put.
There are two general types of options contracts—put and call. Traders purchase put options if they believe the price of the asset (from which the option is derived) is going to go down; they purchase call options if they believe the price of the asset will go up.
The downside of options is that they become worthless upon their expiry. To hold an option, investors must pay for them, the amount paid is called the premium. If options expire and they aren’t exercised (because they aren’t “in the money”), the holder loses the premium paid. Consider the example below:
Investor W has $5,000 to invest. She anticipates an increase in the market price of ABC stock, which is currently priced at $50 a share, so she considers a 0DTE option. The premium for an ABC 50 call is $5 per share and each call covers 100 shares of ABC, so one ABC 50 call costs $500. Investor W uses her $5,000 to buy 10 ABC 50 calls. (Note: it’s a call option because the investor expects the price of ABC stock to increase and the “50” refers to the strike price—if the price of the share was $65, then it would be an ABC 65 call.) Because Investor W paid a $5 premium for each share, she will only profit if the price of ABC stock exceeds $55 before it expires (strike price + premium) when she exercises it (before or at expiration). Even if the stock price increases from $50 to $54, Investor W still loses $1,000 (($55 – 50) x 100 x 10 = $5,000 vs. ($54 - $50) x 100 x 10 =$4,000). However, if the price goes up significantly, say to $58 or $62, then Investor W makes a large return—$3,000 (+60%) or $7,000 (+140%), respectively.1
From the example above, the stock price must increase significantly (more than 10%) in the specified time, and this must happen by expiry, or the investor must time the market extremely well—perfectly to maximize their return.2 For short-term options, such as 0DTE, these requirements for profitability become even less likely because of the time constraint. Now this asset price increase must happen in a very short amount of time (i.e., there must be a lot of volatility in a matter of hours), and the investor can miss out on optimal timing in a matter of seconds. Further, the less time there is to expiration, the less time value there is. If there is time prior to expiration, the investor could sell the option to another holder for more than its original premium, even though exercising it would be worthless at that point in time. The shorter the expiration timeline, the less likely it is a holder can find someone willing to buy their option before expiry.
All of this is to say, the shorter the expiration time the riskier the option is. The investor is virtually betting on the market being extremely volatile and their ability to accurately predict the direction and timing of that volatility. Unsurprisingly, this is why most individuals investing in 0DTE options lose money. This is also why purchasing 0DTE options is likened to gambling—the short timeframe to expiration means the main objective is unlikely to be hedging, but rather a desire to make a high return in a short amount of time.3 One investor described 0DTE trading as having unlimited upside4 while another stated, “Other than a casino, there’s nowhere else you can get a return like that”5—which, at least anecdotally, speaks volumes about the motivation underlying 0DTE options trading.
Individual investors started flocking to short-term options trading with the initiation of COVID-19 lockdowns. Suddenly, people found themselves stuck at home with more time to vigilantly monitor the stock market. Importantly, this also somewhat coincided with the change to commission-free trading—Schwab, TD Ameritrade, E*Trade, and Fidelity all followed Robinhood’s lead by the end of 2019.6 This reduced the average cost (fees + commission) for options from approximately $6 per contract to $0.657, making the barriers to entry much lower. And this has been demonstrated in dramatic average daily volume surges—the average daily volume of 0DTE contracts has increased 300% from January 2022 to March 2023, topping out at 1.2 million contracts according to OptionMetrics.
Source: Cboe (Sep 2023)
However, individual investors underperform the broader market on average because of excessive trading, which is exacerbated by short-term options contracts.8 In general, most individual investors trading in options lose money—between the end of 2019 and June 2021, options traders lost approximately $2.1 billion, with the losses concentrated in options with shorter dates.9 With volatility in the market, individual investors have been increasingly drawn to short-term options, since increasing volatility offers the chance at even higher rewards (and even higher risk). Ultimately, it seems that “free trading” has only served to lure novice traders into making extremely risky trades without realizing it.
As a Financial Professional, you may have clients who currently dabble in short-term options or who may be curious about why there has been increased interest in them; or you may not encounter such interest at all. Regardless, the behaviors, biases, and psychological underpinnings driving short-term options trading offer impactful insights into the broader spectrum of financial decision-making.
Regardless of the product or strategy being considered, it is especially important to understand that, while gambling risk and investment risk fall under the larger umbrella of financial risk, they are treated distinctly by individuals. Different biases will be more pronounced with gambling risks than with investment risks, and clients who may act risk averse over investment risks may be more risk-seeking over gambling risks. Thus, if investors view short-term options (or other financial products) as more similar to gambling than investing, it is important to know how the perception of and response to these types of risks differ from investment risks.
0DTE options have been compared to lotteries, and this comparison is not unwarranted. Both have low costs to enter (for options, low fees), low probabilities of a gain (i.e., a negative expected value), and no losses beyond the admission price (price of a lottery ticket or premium + fee for an options contract). They both also have an incredibly important facet when it comes to gambling—the elicitation of hope. And hope has been shown to increase risk-seeking.10 Research supports this further, empirically demonstrating that with lotteries, individuals tend to focus on the much more salient large potential return than on the far less salient small cost of the ticket.11
Prospect theory, from which loss aversion is derived, has an interesting feature related to how probabilities are weighted that can systematically explain why some investors are drawn to 0DTE options (and lotteries). Specifically, there is something called the possibility effect. Accordingly, individuals are much more reactive to a move from impossibility to possibility, making small probability large gains more appealing.12
“Without a ticket you cannot win, with a ticket you have a chance, and whether the chance is tiny or merely small matters little. Of course, what people acquire with a ticket is more than a chance to win; it is the right to dream pleasantly of winning.” – Daniel Kahneman in his book Thinking, Fast and Slow.
To address the possibility effect and distortions around small probabilities, it can help to provide objective feedback about outcomes. While it’s hard to measure how often a single asset fluctuates more than X% in a day, going through daily percentage changes can be helpful to show just how irregularly fluctuations of more than 10% occur. It may also be helpful to illustrate how many times the S&P 500 has fluctuated more than 10% in a single day (spoiler alert: it’s incredibly rare).
As with much of financial decision-making, overconfidence plays a large role in an individual’s desire to engage in 0DTE options trading. Underlying overconfidence are several factors, including two of particular relevance: overoptimism and the illusion of control. Overoptimism results in an individual believing their chances of profiting are higher than they are (this can also be magnified by the possibility effect). It also leads to an undue focus on the upsides (vs. any downsides).
The illusion of control results in an individual believing they can facilitate positive outcomes through personal skill. For example, a 0DTE trader quoted in The Wall Street Journal described his approach in this arena as follows: “I’m just exceptionally good at it.” This implies the trader genuinely believes he has some level of skill that other traders do not have, and that the role of randomness is basically non-existent. Importantly, the illusion of control leads us to ignore risk caused by the environment in which we are acting as well as unknown unknowns (unforeseeable risks). This is why some people prefer driving to flying (they are behind the wheel rather than a perfect stranger also known as a pilot), and why some people don’t wear seatbelts while driving (they overestimate their role in determining whether they make it safely from point A to point B and disregard or underestimate the role other drivers play in determining their survival rate on the road).
To diminish the effect of overconfidence and the illusion of control, show clients how “skilled” they are at predicting and facilitating success in short-term options trading. For example, ask the client to do a practice round of 0DTE options investing, where they track returns for a week of investing as if they were actually doing it (or have them actually invest with very small amounts of money). It is important that the client commits to an asset and identifies when they would exercise the option at that time (not after the expiration date). Then have them total up their returns (or losses) for the week and see how they actually performed. Since asset prices involve inherent randomness, an investor can do well by chance alone, but this is unlikely to persist over time, so it is important to have them experiment with investing for at least several days and across several different 0DTE options.
When it comes to gambling, there are many fascinating behaviors that can occur. These are driven by recency (plus a little magical thinking) and mental accounting. Recency, the tendency to make predictions based on the most recent data (e.g., news, prices, information) rather than historical trends, can lead to fallacious beliefs regarding the behavior of chance. One of the most commonly recognized beliefs tied to recent outcome patterns is the Gambler’s Fallacy.
The Gambler’s Fallacy is defined as a belief that, after a series of wins (losses), a gambler is “owed” a loss (win). This downplays the, not unusual, occurrence of streaks in random outcomes. In the context of 0DTE trading, a client could persist in bad risk-taking because of this fallacious belief. This would manifest itself as a client making continued high-risk trades after a series of net losses because they believe they are due for a gain. In reality, randomness is not a self-correcting process.
Mental Accounting, which is a framework that describes how people categorize and track their money, results in an interesting empirical finding in the context of gambling: the House Money Effect.13 Accordingly, when gamblers win money, they tend to treat that money as “fun money.” And this categorization can lead to significantly different financial decision-making as a result. When money is seen as “fun,” people are more likely to spend it and more likely to use it to gamble. Thus, after a trader has reaped profits from a trade, the House Money Effect would make them more likely to take on increasingly risky options contracts with that money because it is viewed as a windfall (and losing it is not as painful).
To combat the detrimental effects of the House Money Effect, you must help the client integrate those profits (gains) with their overall portfolio or investment outcomes. By getting the client to see those gains as actual income to be lost rather than a windfall, it induces loss aversion for the money and results in it being categorized as income, which tends to be spent more responsibly. One way to integrate any profits would be to have your client immediately move any gains from trading from that brokerage account to another account (e.g., their bank account or a savings account). This eliminates the “fun money” categorization and makes it much more (psychologically) difficult for the client to take on greater risk with those funds.
Finally, the role of the Fear of Missing Out (FoMO) and competition in short-term options trading cannot be ignored. Much of 0DTE trading can be driven by the regret of inaction. In other words, if a client is active on social media, sees news about increasing 0DTE trading, or has friends/family that are actively trading in 0DTE options, they may feel an intense drive to jump on the bandwagon. This is because they fear that if they don’t, and they miss out on the opportunity, they will feel regret over their choice not to participate. Related, a sense of competition can be created by social dynamics that may make a client feel as if the large possible gains are theirs to lose and if they don’t invest, they are giving those gains to someone else.
The best way to deal with social dynamics like FoMO, herding, and regret aversion (the latter related to an inability to follow the crowd), is via a commitment device. Ask clients to avoid using social media or word-of-mouth to make investment decisions. You can also explain how jumping on the 0DTE trading bandwagon can make such activity even riskier. This is because volatility trading can create a feedback loop wherein the desire to trade on volatility can create more volatility as speculative trading amplifies price movements in short-term options. And it is the greater volatility of options that makes them riskier than other financial products.
Interest in short-term options trading has grown rapidly. Individual investors are using such options to gamble in the stock market—focused on the low-probability for potential large returns. Gambling risks entail a unique set of biases and behaviors that can affect how a client makes financial decisions. If you have clients who are interested in short-term options or who see investing as analogous to gambling, it is imperative to know how to respond based on the existence of these biases and behavioral tendencies.
o The Possibility Effect
o The Illusion of Control
o The Gambler’s Fallacy
o The House Money Effect
o FoMO and competition
o Provide objective feedback about outcomes and probabilities.
o Create commitment devices around social media use for investing strategies.
o Have clients integrate any profits from such trading with their income or savings accounts.
Atlas Point can help you identify which of your clients are most prone to these blind spots and emotional responses. You can assess clients for several biases using our signature Financial VirtuesTM survey. Our Financial Virtues™ survey assesses Loss Aversion and the Status Quo bias (both of which can be a proxy for the Possibility Effect); Overconfidence (which captures Overoptimism); the Illusion of Control; and Herding (which underlies FoMO). You can try our Financial VirtuesTM survey here: Financial Virtues Survey
Atlas Point also has several Pulse Checks that can help you determine whether your clients may be more likely to show interest in short-term options trading—Gambler’s Fallacy, Loss Aversion, FoMO, and Recency. You can try each of these Pulse Checks using the links below:
 This example was adapted from Robinhood’s extensive document, “Characteristics and Risks of Standardized Options” (March 2023). Robinhood states, “Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies.” A PDF of this document is available here and is recommended for anyone who wants to understand options and their risks in more detail.
 In this example (and throughout this post), it is assumed the options are American-style (vs. European-style) and that holders can exercise their contract at any time up to and including the expiration point. European-style options can only be exercised, if desired, at expiration.
 Investors, particularly institutional investors, use options to hedge their investments in an asset. If there is high volatility, investors holding the underlying asset may also purchase options on the asset to manage their risk exposure. For very short-term options, this risk mitigation strategy does not make sense—the risk of the options is too high to justify its use for hedging.
 Banerji, Gunjan. “Amateurs Pile Into 24-Hour Options: ‘It’s Just Gambling’.” The Wall Street Journal, 12 Sep 2023, https://www.wsj.com/finance/stocks/options-individual-investors-risk-gambling-a97bee1a.
 Banerji, Gunjan, and Alexander Osipovich. “Free Trades, Jackpot Dreams Lure Small Investors to Options.” The Wall Street Journal, 24 Jun 2020, https://www.wsj.com/articles/free-trades-jackpot-dreams-lure-small-investors-to-options-11592991000.
 This isn’t to say these brokers lost money. Brokerages made in excess of $2 billion on options orders in 2022. This is over two-fold what they made from stock orders. This is because they can capitalize on the wider bid-ask spreads associated with options. See: Banerji, Gunjan. “Amateurs Pile Into 24-Hour Options: ‘It’s Just Gambling’.” The Wall Street Journal, 12 Sep 2023, https://www.wsj.com/finance/stocks/options-individual-investors-risk-gambling-a97bee1a.
 Royal, James. “Zero-Fee Broker Commissions: Here’s Who The Big Winner Is.” Bankrate, 4 Oct 2019, https://www.bankrate.com/investing/zero-fee-broker-commissions-long-term-investors-win/.
 Odean, Terrance. “Do Investors Trade Too Much?” The American Economic Review, 89(5), December 1999, pp. 1279–98, doi:10.1257/aer.89.5.1279. Accessible here: http://faculty.haas.berkeley.edu/odean/papers%20current%20versions/doinvestors.pdf.
 Bryzgalova, Svetlana and Pavlova, Anna and Sikorskaya, Taisiya, "Retail Trading in Options and the Rise of the Big Three Wholesalers." Journal of Finance forthcoming. Available at SSRN: https://ssrn.com/abstract=4065019 or http://dx.doi.org/10.2139/ssrn.4065019.
 Lopes, Lola L. “Between Hope and Fear: The Psychology of Risk.” Advances in Experimental Social Psychology, Elsevier, 1987, pp. 255–95, http://dx.doi.org/10.1016/s0065-2601(08)60416-5.
 Camerer, Colin F. “Prospect Theory in the Wild: Evidence from the Field.” Choices, Values, and Frames, eds. Daniel Kahneman and Amos Tversky, Cambridge University Press, 2000, pp. 288–300.
 Individuals struggle to comprehend extreme probabilities, so extremely unlikely outcomes tend to be overweighted (or ignored—though this response is irrelevant for this discussion as clients who ignore extremely low probabilities of a positive outcome would be unlikely to show an interest in 0DTE options trading).
 Thaler, Richard H., and Eric J. Johnson. “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice.” Management Science, No. 6, June 1990, pp. 643–660, doi:10.1287/mnsc.36.6.643.