0DTE Volatility and Its Impact on Options Markets

The rise of zero-day-to-expiration (0DTE) options has reshaped the landscape of options trading, particularly in the wake of volatility spikes that have characterized markets from 2023 to 2024. These instruments, which expire at the end of the trading day, have become a focal point for both retail and institutional investors, though their strategies and outcomes diverge sharply. As data from the CBOE and industry reports indicate, 0DTE options now account for over 50% of S&P 500 index options trading volume, a surge driven by retail enthusiasm and macroeconomic uncertainty. This shift has not only amplified intraday volatility but also exposed stark contrasts in how different market participants navigate near-term risk.

Retail Traders: Speculation and Behavioral Pitfalls

Retail investors have emerged as dominant players in 0DTE markets, with their trading volume accounting for 50-60% of SPX 0DTE activity. Their preference for limited-risk strategies-such as long calls or puts and short spreads-reflects a desire to cap potential losses, yet this approach has proven vulnerable during volatility spikes. For instance, during a sharp market correction in early April 2025, retail participation in 0DTE trading fell from 57% to 47% as speculative fervor waned. This behavior underscores a key trait of retail traders: their reliance on high-conviction, short-term bets often influenced by social media narratives and low-cost platforms.

Despite the allure of 0DTE options-driven by minimal time value and daily expirations-retail traders frequently face substantial losses. A 2024 study found that over 75% of their S&P 500 options trades involved 0DTE contracts, yet profitability remained elusive due to poor risk management and overexposure to intraday swings. The introduction of daily expirations in 2022 further normalized 0DTE trading, but it also created a "gamification" effect, where traders treat options as quick, high-leverage wagers rather than hedging tools.

Institutional Strategies: Precision and Hedging

In contrast, institutional investors have approached 0DTE options with a focus on precision and risk mitigation. During volatility spikes, they have leveraged these instruments for strategies such as premium harvesting and calendar spreads, which exploit discrepancies between expiries. For example, institutions often use 0DTE options to hedge against macroeconomic announcements, capitalizing on compressed time-to-expiry to adjust positions rapidly without overpaying for time decay as institutions have demonstrated.

Algorithmic trading has further enhanced institutional dominance in 0DTE markets. With 61% of the algorithmic trading market share in 2024, institutions deploy sophisticated tools to optimize execution and manage convexity risks. Their strategies are rooted in scalable, data-driven models that contrast sharply with the idiosyncratic, often herd-like behavior of retail traders. For instance, while retail volumes spike predictably at times like 10:00 am and 2:00 pm, institutions use automated systems to avoid liquidity traps and maintain disciplined position adjustments.

Market Implications and Vulnerabilities

The growing interplay between retail and institutional activity in 0DTE markets has introduced new vulnerabilities. Market-makers, tasked with hedging 0DTE positions, often exacerbate volatility through rapid adjustments, creating feedback loops that amplify price swings. This dynamic was evident in late 2024, when a surge in 0DTE trading coincided with heightened gamma exposure, forcing market-makers to rebalance portfolios at the expense of broader market stability.

Moreover, the leveraged nature of 0DTE contracts has raised concerns about systemic risk. A Bank Underground report warned that the proliferation of these instruments could intensify market corrections, particularly if retail-driven demand outpaces institutional capacity to hedge effectively. This tension highlights a critical challenge for regulators: balancing innovation in short-dated options with safeguards against destabilizing feedback loops.

Conclusion

The 0DTE options boom reflects a broader transformation in trading behavior, where retail speculation and institutional precision coexist-and sometimes clash. While retail traders are drawn to the simplicity and low cost of 0DTE contracts, their strategies often lack the sophistication to withstand volatility spikes. Institutions, by contrast, treat these instruments as tools for granular risk management, leveraging technology and capital to navigate intraday turbulence. As 0DTE trading continues to evolve, the market must grapple with its dual role as both a catalyst for innovation and a potential source of instability.