0DTE Options and the Price of Tail Protection

Abstract

On May 16, 2022, the addition of Tuesday and Thursday weekly expirations extended SPX same-day-expiry (0DTE) options to every weekday. SPX put skew compressed across tenors, peaking at 71 basis points at 30 days. A cross-tenor difference-in-differences design and the staggered identical 0DTE expansion in the Russell 2000 twenty months later rule out alternative drivers. Two reinforcing channels operate at distinct tenor bands: customer flow substitutes into pure-intraday 0DTE contracts at the short end, and dealer warehousing costs fall, with dealers absorbing more put-gamma at intermediate tenors. The implied annual reduction in the cost of equity tail insurance is approximately $1.4 billion. Post-2022 skew partly reflects intermediation-cost changes alongside tail-risk preferences.

Keywords: 0DTE Options, Implied Volatility Skew, Dealer Hedging, Tail Risk