The boom in zero-day options is coming for Tesla and Nvidia

Zero-day-to-expiry options let investors bet on whether a particular stock-market index will rise or fall by the end of the day. They have drawn an enthusiastic following among amateur investors, even as skeptics call them a form of gambling. They are sometimes known by the hashtag #0dte.

So far, the #0dte boom has been limited to options tied to indexes such as the S&P 500 or Nasdaq-100. The next frontier could be options on stocks such as Tesla or Nvidia.

Currently, options tied to individual stocks expire weekly, on Fridays. To bring #0dte to single-stock options, exchanges would need to add new expirations for Monday through Thursday.

Michael McCaskill, a 48-year-old day trader and volleyball-programs coordinator in Louisville, Ky., trades short-dated options in hopes of hitting the jackpot. He’s intrigued by the prospect of more-frequent expirations on single-stock options.

“The percentage gains are incredible," said McCaskill, who has previously made profitable bets on GameStop, Netflix and PayPal. “It’s the short-dated options that give you that, whether it’s weekly or daily."

Financial-industry executives hope that rolling out daily expirations on single-stock options can unleash a trading bonanza. But it would also pose new risks for investors, particularly for options that expire on days when a company reports earnings after 4 p.m. ET. With daily expirations, many more options would expire the same day as large, after-hours price moves. Few companies report earnings on Fridays.

During the past year, brokers, exchanges and electronic-trading firms—including heavyweights such as Charles Schwab and Citadel Securities—have discussed the pros and cons of bringing the #0dte model to options on individual stocks, people familiar with the matter said.

In closed-door industry meetings, retail brokerages such as Robinhood Markets, Schwab, Tastytrade and Morgan Stanley’s E*Trade have advocated for a cautious approach, concerned they could face a customer backlash if investors’ options trades blow up, the people said.

Other firms—including Susquehanna International Group, a huge options-market maker, and Nasdaq—have actively promoted bringing daily expirations to single-stock options, the people said. Both market makers and exchanges stand to benefit from the volumes that could come from further growth in the #0dte phenomenon.

The earliest that #0dte might come to options on individual stocks is late 2025, the people said. Some proponents of the move have suggested a limited launch, covering options on just a small number of stocks initially, to give investors time to adapt.

Options give investors the right to buy or sell stocks at a specific price—known as the “strike price"—by a stated expiration date. Once seen as a complex tool for sophisticated traders, options have gained broader popularity among individual investors in recent years.

Part of the appeal is that options can be used to amplify bets. For instance, an investor who is bullish on Tesla might buy call options—giving the right to buy Tesla shares—with a strike price of $240, above where the stock is currently trading. Such options are sensitive to moves in Tesla’s share price, and they can generate big profits if Tesla stock climbs.

The options market has evolved over the years to offer more-frequent expirations, from quarterly to monthly to weekly and now, in some cases, daily. The #0dte boom began in 2022, when Cboe Global Markets, the biggest U.S. options-exchange operator, expanded its suite of S&P 500 options to have expirations five days a week.

When index options expire, they are settled with cash going in or out of an investor’s brokerage account. In contrast, single-stock options are settled with purchases or sales of shares, creating potential pitfalls for investors.

In general, single-stock options are exercised automatically if they are “in the money" at 4 p.m. ET—meaning that it would be profitable to buy or sell the stock at the strike price. So if the investor is holding a Nvidia call option with a strike price of $124, allowing him or her to buy 100 shares of Nvidia, and the stock closes above that level, the option is exercised with a purchase at a price of $124. So the next time the investor checks his or her brokerage account, it will have $124,000 less in cash and 100 more shares of Nvidia.

Normally, that would be a good trade. But if it had happened Aug. 28, when the chip maker released a highly anticipated quarterly earnings report, the investor would have taken a bruising.

That day, Nvidia closed at $125.61. Minutes later, its earnings sent Nvidia shares tumbling in the after-hours market, before they reopened at $121.36 the next morning. In that scenario, buying the stock for $124 would no longer be attractive.

Savvy investors can avoid such an outcome by sending “do no exercise" instructions to their brokers. But brokerages vary in how easy it is to send such instructions, and how late they can be sent. Some brokers set a cutoff time of 4 p.m. ET, meaning their customers can’t possibly know how the earnings will look before they must make the decision.

Write to Alexander Osipovich at alexo@wsj.com