0DTE Options. Meme Coins. Parlay Bets.
What do these three have in common?
The growth of 0DTE (zero days to expiration) options trading, the rise of meme coins, and the popularity of parlay bets are all emblematic of a broader trend in the financial and betting markets towards high-risk, high-reward strategies. At first glance, these reflect a shift in behavior toward a desire for more rapid or larger gains despite the potential for greater losses. In today’s world, information flows faster than ever, so anyone looking for a quick reward or dopamine hit can get it from trading and betting apps on their phone.
0DTE Options
0DTE options are contracts that expire within the trading day they are bought. In recent years, the options trading landscape has meaningfully evolved, particularly with a surge in short-dated options transactions. This trend is largely fueled by the introduction of more frequent expiry options, seeking to enable investors to navigate events with greater precision. Additionally, the demographic of options traders has expanded, resulting in a noticeable increase in trading volumes across the board, from institutions to retail participants.
Investors have flocked toward them for the potential of high returns from small market movements due to their low cost and high leverage. However, 0DTE options carry significant risk as their value can fluctuate wildly, and predicting short-term market movements accurately is challenging. Some say that investing in 0DTE options is really just gambling due to their speculative nature and the high risk of loss. However, like certain casino bets they offer the potential for sizable upside with limited upfront cost and just like throwing down chips on the craps table one wins or loses by the end of the day or night.
However, unlike the speculative frenzy observed during the meme-stock wave of 2020-2021, the current upswing in S&P 500 0DTE trading showcases a more disciplined approach. Over 95% of these trades are characterized by limited risk exposure, marking a departure from the high-risk strategies of the past. Investors are predominantly engaging in balanced trades, such as selling vertical spreads or constructing iron condors, to generate premium, with the average trade size being modest in comparison to the index level.
0DTE Options have Exploded
Source: Cboe Exchange, Inc., as of December 31, 2023.
Meme Coins
According to CoinGecko, the market cap of meme coins has surged to approximately $67 billion at time of this writing. This is roughly the size of shipping giant FedEx Corp (FDX). Meme coins are digital currencies inspired by internet memes or jokes. They are often characterized by rapid community-driven fluctuations in their value. Unlike traditional cryptocurrencies like Bitcoin or Ethereum, which are developed for specific technological or financial functions, meme coins typically lack a foundational purpose or utility. Their market performance is highly volatile, driven mainly by speculative trading, distinguishing them significantly from more established crypto assets with tangible use cases and adoption. A recent example of outsized returns is the $72m market cap Doge Eat Doge coin, which is up 19,804% over the last 30 days.1
Some point to “investing” in meme coins to also be like gambling, but that view misses an important component of the proliferation of meme coins, which is the community aspect. Someone can invest in a meme coin because they or their network have an affinity for the coin without having to understand a lot about cryptocurrencies. The figure below highlights the top 10 meme coins according to CoinGecko. Notably, six of them do not display a one-year return because they are less than a year old.
Source: CoinGecko, as of April 1, 2024.
Parlay Bets
Parlay bets have risen in popularity over the last couple of years increasing from 20% of total sports betting revenue in 2021 to 27% in 2023. For those unfamiliar with sports betting, a parlay bet in sports betting combines multiple individual wagers into a single bet, requiring all components to win for the bet to pay off. What is exciting about parlays is their potential for high payouts on relatively small investments, as the odds of each selection are multiplied together. This compound effect can lead to significant returns if all parts of the bet come through, making parlays an attractive option for bettors seeking the thrill of a big win from a relatively small stake. For example, same game parlay bets offer instant excitement and the potential for high rewards from one event, providing a swift and intense dopamine surge.
Of course, the difficulty of hitting on all selections also increases the risk of loss simply because more than one bet is involved. However, there may be a flip side to parlays simply being riskier. One is that parlays allow bettors the ability to hedge their bets to manage risk, especially if the last leg of a parlay is pending. If the first few selections win, a bettor could place a bet against their final selection seek to ensure they walk away with some profit regardless of the outcome. This strategy helps to reduce the risk of walking away with nothing after a series of successful selections. In addition, experienced bettors use parlays strategically as part of a broader betting strategy, rather than relying on them as their primary method of betting. And lastly, since parlays can be made with relatively small stakes, bettors can limit their risk by wagering amounts they are comfortable losing. This affordability factor means that while the risk of losing the bet might be high, the financial risk can be controlled.
Parlay Bets have Increased over the Last Year
Source: Illinois Gaming Board, as of November 30, 2023.
Putting It All Together
While it can be convenient to think that the U.S. stock market is now the world’s largest casino, we do not believe it to be true nor is it reasonable to conclude that markets must be poised for future negative returns. The long-standing AAII Investor Sentiment Survey asks individual investors weekly their thoughts on where the market is heading in the next six months. Investor sentiment fluctuates significantly over time as can be seen below. The blue line represents the difference between investors reporting bullish versus bearish sentiment. The orange line denotes the average sentiment, while the green and blue lines mark one standard deviation above and below the average, respectively. As of the most recent survey, 50% were bullish, 22% were bearish, and 28% were neutral. The spread between bulls and bears stood at 28%, which is elevated from the long-term average of 6% and above the one standard deviation of 25%.
Investors are Bullish, but Not at Extremes
Source: Bloomberg Finance, L.P., as of March 31, 2024.
So while retail investors may be more bullish than bearish, not all parts of the market are reflecting euphoria. Just look at the softness of small caps and high beta stocks this year. One of the best places to look for signs of extreme behavior is the performance of non-profitable tech companies. Since peaking in 2021, they remain in 70% drawdown with investors favoring profitable firms like the Magnificent Seven stocks. When investors shy away from speculative bets on unprofitable entities in favor of fundamentally strong, profitable firms, it suggests a shift towards risk aversion and a preference for sustainable earnings growth.
Non-Profitable Tech Companies Remain in a Significant Drawdown
Source: Bloomberg Finance, L.P., GSXUNPTC Index as of March 31, 2024.
Some will point to the increase in 0DTE options, meme coins, and parlay bets as representing excess and sign of a gamification of investing, we would agree it is more nuanced than that. It may actually reflect a more discerning investment approach. While these trends certainly have some similarities to betting in a casino, it is unlike the TMT bubble or the meme stock craze where only the allure of quick buck and momentum ruled the day. To be clear, we do not believe that investors, traders, or bettors should risk more than they can lose or that they should not do their homework. In fact, we advocate that folks do so just as we believe the headlines that the “Degen Economy” may not be as negative as they seem.
1 Source: CoinGecko, as of April 1, 2024.
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