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Retail traders embrace volatility: Zero-day options and penny stocks on today’s menu

Early this month the London-based Financial Times newspaper brought to my attention two important trends happening in the main stock markets of India and the USA. There are many reasons being put forward for the surge in volume in specialist segments of these two important exchanges. Keeping it simple, I’d suggest its pure greed at the prospect of large gains – quickly.

The average daily traded value of options on shares in India’s Nifty 50 index is $1.64 trillion in 2024. This compares with the $1.44 trillion worth of options changing hands daily on S&P 500 equities. Daily! Talk about the tail wagging the dog. However, open interest – options bought or sold and held overnight – is far higher in US equity options.

Which leads us to what are known as zero-day options in India. These are options that expire at the close of that day’s business. In other words, extremely short term and therefore much cheaper than those of all other maturities. And with the index hitting new record highs in June, the lure is that ‘’people have just realised that with a very small amount of money they can take very large bets’’, said Mumbai-based fund manager Abhay Agarwal.

American punters have taken another route to leveraged bets. They’ve reverted to traditional penny stocks – those where the face value is less than one dollar – and used heavily by the famous stock operator Jesse Livermore. During May this year seven of the ten most traded US stocks were these tiddlers; only the perennial favourite Tesla made it into this top ten by volume. Obviously by value it’s a very different story. Fund managers tend to avoid penny shares because they risk being delisted. Increasingly, of the 458 companies whose shares trade for less than a dollar, these businesses are resorting to reverse splits, swapping several of their shares for one with a bigger face value, as a way of avoiding delisting.

Not wishing to miss a trick and a quick buck, the Chicago Mercantile Exchange has this year listed ever smaller futures and option contracts, diversifying the range available from equities to metals.

Posted in Education, Finance, General, Markets, STA charts, STA education, STA news, Technical Analysis
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The views and opinions expressed on the STA’s blog do not necessarily represent those of the Society of Technical Analysts (the “STA”), or of any officer, director or member of the STA. The STA makes no representations as to the accuracy, completeness, or reliability of any information on the blog or found by following any link on blog, and none of the STA, STA Administrative Services or any current or past executive board members are liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. None of the information on the STA’s blog constitutes investment advice.

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