Volatility pushes zero-day S&P 500 volumes to new record
Volumes in equity options that expire the same day they’re traded have hit a new record this month as more institutional investors have turned to the ultra-short-dated derivatives to shield themselves against the market fallout from the war in Iran.
Average daily volumes in zero-day-to-expiry – or 0DTE – S&P 500 options have risen 4% this month to an all-time high of 3.1m contracts, according to Cboe, overtaking the previous record of 2.9m contracts in February.
The rise in activity primarily stems from an uptick in tactical hedging from institutional investors trying to shield themselves against this year’s volatile market backdrop, said Mandy Xu, Cboe’s head of derivatives market intelligence.
Cboe said institutional investors accounted for 48% of 0DTE activity in March compared to an average of 46% over the first quarter.
“We are seeing a slightly higher share of institutional activity in recent weeks, given the pickup in overall market volatility, which is consistent with the feedback that we've heard from market makers and other liquidity providers who use 0DTE options to hedge their own books in times of higher volatility,” Xu said.
“We saw a similar trend last year during 'liberation day',” she said, referring to US president Donald Trump’s announcement in April of sweeping US tariffs.
Bigger pie
Despite hitting fresh highs this month, zero-day contracts’ share of overall S&P 500 options activity has nevertheless declined in recent weeks following a surge in longer-dated options trading. Non-0DTE S&P 500 options average daily volumes are up 27% in March from February, pushing volumes in all S&P 500 options to an all-time high of 5.3m contracts.
That comes as investors have increasingly looked to hedge for longer periods given the considerable uncertainty over how long the Middle East conflict could last – as well as the broader impact on markets. That shift in hedging behaviour has seen 0DTE options as percentage of overall S&P 500 activity fall to 58% in March, according to Cboe, from a record 63% in February.
“Overall, if you’re worried about AI – or Iran – becoming a medium-term issue, you really don’t want to be hedging that on a day-to-day or week-to-week basis,” said Stuart Kaiser, head of equity trading strategy at Citigroup. “Instead, you’ll want to put a three to six months hedge in place that you can roll on an ongoing basis – or target specific stocks or sectors.”
Cboe completed its S&P 500 0DTE offering in 2022 when it added contracts expiring on Tuesdays and Thursdays to its range of weekly S&P 500 options. Investors have since flocked to the derivatives thanks to their ability to deploy risk management and investment strategies with exacting precision around major market events, whether that's economic data releases or central bank announcements.
Volumes have subsequently soared, increasing by more than 43% over the past 12 months – and helping to drive a broader growth in S&P 500 options activity.
Old concerns
The speed of 0DTE options growth has ignited concerns in some corners that these derivatives could undermine market stability, especially if the balance of activity across retail and institutional flow – or the ratio of puts to calls – was to tip significantly in one direction.
“0DTE have become very popular with retail traders, which is an interesting dynamic given that these investors weren’t previously that involved in index trading but have become incredibly active in 0DTE,” said Garrett DeSimone, head of quantitative research at data provider OptionMetrics.
This year, it’s the ratio of puts to call options that has come under scrutiny from some analysts following the increase in hedging activity among institutional investors. Kieran Diamond, derivatives strategist at UBS, said there are concerns that outsized activity in 0DTE puts relative to 0DTE calls could exacerbate market volatility in a situation where investors are selling their options at the same time the market is facing a broader selloff.
"We typically see a small bias towards investors selling more short-dated options than they buy, which means that market-makers hedging the risk on the other side will be buying on dips and selling on rallies, so incrementally dampening equity volatility," said Diamond.
"Since mid-February, however, we’ve seen this bias reverse, with more client buyers than sellers, as the market backdrop has grown more uncertain. This means that options risk managers will have been buying equities as the market rises, and selling equities in declines to hedge their short gamma risks, and this may have been adding to some of the intraday price swings that we’ve seen recently."
Xu said the put-call ratio “has remained broadly stable” in recent weeks, and has remained so throughout multiple periods of heightened market volatility, such as the aftermath of Trump’s “liberation day” tariff announcements in April.
“The biggest misunderstanding people have with 0DTE options, and the potential market impact of those options, is that they equate high volume with high risk,” she said. “But the assumption that the majority of 0DTE activity is customer buying and market-makers being short gamma is categorically false. For both retail and institutional investors, activity is very balanced between buy versus sell – which hasn’t changed across different market or volatility regimes.”