0DTE Index Options and Market Volatility: How Large is Their Impact?

Abstract

The large volume of trading in 0DTE S&P 500 index options suggests that options market makers (OMMs) have large positions in these options. Because short-dated options have large gammas, OMMs’ hedge rebalancing trades might be large enough to impact the index. We estimate the maximum impact of OMM gamma on index volatility using proprietary trade data to determine the aggregate position of OMMs, and their gamma. We then estimate models that relate market volatility to the OMM gamma, and simulate the models under the counterfactual assumption that OMM gamma does not impact volatility to identify the impact of OMM gamma.

Keywords: 0DTE options, SPX options, S&P 500 index options, hedge rebalancing, gamma squeeze, options trading

JEL Classification: G12, G13, G23, G24