0DTE Asset Pricing

Abstract

We document asset pricing implications of the new zero days-to-expiration (0DTE) options, which today account for half of the total S&P 500 option volume. We show that: (i) most of the intra-day equity premium is attributable to market returns between -5% and 0%; (ii) investors demand a high compensation to bear variance risk over the day, which is mainly due to compensation for upside risk; (iii) the variance risk premium predicts intra-day market returns, with a negative relation that is driven by the upside risk premium; and (iv) 0DTE options violate stochastic dominance restrictions, where exploiting this relative mispricing is highly profitable. Our findings contrast with evidence from longer horizons and are consistent with a nonmonotonic pricing kernel that is especially high for positive market returns.

Keywords: zero days-to-expiration (0DTE) options, equity premium, variance risk premium, pricing kernel, option returns

JEL Classification: G11, G12, G13