Does 0DTE Options Trading Increase Volatility?
Read the paperopens papers.ssrn.com in a new tab
What they found
The authors tracked the growth of same-day-expiry options on indices, which rose from a negligible share to nearly half of index option volume by 2023, and asked whether this trading affects the volatility of the underlying. Using the staggered introduction of weekly expirations across index products as a natural experiment, they found that increases in 0DTE trading raise the volatility of the underlying index, an effect that persists after controlling for market makers' gamma hedging and appears to be driven primarily by speculative retail order flow.
What you can use
- Heavy 0DTE trading is associated with higher intraday volatility in the underlying index, not lower.
- Dealer gamma hedging is only part of the story; the speculative flow itself moves the market.
- If you trade index futures or ETFs intraday, 0DTE option positioning is now a relevant driver of the tape.
Caveats
Working paper; identification relies on a natural experiment whose validity can be debated. Effect sizes are moderate and the mechanism is still being studied by other researchers with different conclusions.
Tags: options, 0dte, volatility, gamma
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.