0DTEs: Trading, Gamma Risk and Volatility Propagation

Abstract

We study the recent explosion in trading of same-day expiry (0DTE) options on the S&P500 index and examine if this trading activity is destabilizing for the underlying index. We find that Market Makers’ inventory, as measured by the net gamma of their positions, is on average positive and negatively related to future intraday volatility. We also show evidence suggesting that positive (negative) Market Makers’ inventory gamma strengthens intraday price reversal (momentum). Our empirical evidence is consistent with delta-hedging but inconsistent with information-based trading.

Keywords: 0DTE, ultra-short options, variance risk premium, volatility trading, gamma risk, volatility propagation

JEL Classification: G11, G12, G13, G17