0DTE Volatility and Its Impact on Short-Term Options Markets

The surge in zero-day-to-expiration (0DTE) options trading has fundamentally reshaped short-term market dynamics, creating both opportunities and risks for investors. As these instruments dominate options activity-accounting for over 60% of S&P 500 options volume in late 2025-their influence on volatility patterns, liquidity, and strategic positioning has become impossible to ignore. This article examines the evolving role of 0DTE options, their impact on market behavior, and the tactical adjustments required to navigate this high-stakes environment.

The Rise of 0DTE Options: A Double-Edged Sword

0DTE options, which expire at the end of the same trading day they are purchased, have surged in popularity due to their low premiums, rapid theta decay, and limited overnight risk according to market analysis. By November 2025, they constituted 57% of SPX index options volume, driven by both institutional and retail participation. Retail traders, in particular, have embraced these instruments for their flexibility in hedging intraday risks or capitalizing on short-term price swings. However, this growth has introduced systemic risks. For instance, systematic short-option strategies like iron condors-favored by retail investors-have been linked to suppressed market rebounds, as dealers hedge aggressively to maintain delta neutrality.

The April 2025 market turmoil exemplifies this dynamic. During periods of heightened volatility, dealers dynamically adjusted their positions, amplifying downward pressure in falling markets and contributing to sharp rebounds. While retail participation temporarily dipped during this period, it rebounded swiftly once volatility eased, underscoring the resilience of 0DTE trading as a limited-risk tool.

Tactical Adjustments: Navigating Gamma and Theta Challenges

The unique characteristics of 0DTE options-namely, their sensitivity to gamma and theta-demand disciplined strategic adjustments. Gamma risk, which measures the rate of change in delta, becomes acute as expiration approaches, causing rapid shifts in option values even with minor price movements. Similarly, theta decay accelerates in the final hours of trading, eroding a significant portion of an option's value within minutes.

To mitigate these risks, traders have adopted strategies such as deep-out-of-the-money (OTM) credit spreads, which limit downside exposure while capitalizing on directional bets. For example, opening a credit spread early in the day and employing stop-loss ladders to manage volatility spikes has become a common approach. Institutional investors, meanwhile, have integrated 0DTE options into scalable workflows for hedging directional risk around earnings reports or economic data releases.

Positioning for Expiry Cycles: Precision and Discipline

Positioning ahead of key expiry cycles requires precise timing and liquidity management. Retail traders often favor high-delta, low-premium options when anticipating intraday moves according to market analysis, while institutions focus on gamma hedging and dynamic risk rebalancing according to institutional reports. Market makers, in particular, play a pivotal role in amplifying price swings during the final moments of trading, as they adjust portfolios to offset gamma exposure according to market analysis.

A case in point is the S&P 500's behavior during late 2025 expiry cycles. Data reveals that the index often experiences limited intraday gains but rallies post-expiration, a pattern attributed to the drag from short iron condor strategies. Traders who recognize this dynamic may adjust their positioning by closing short-term spreads before expiry or shifting to longer-dated options to avoid liquidity crunches.

The Path Forward: Balancing Opportunity and Risk

While 0DTE options offer unparalleled flexibility, their risks-particularly during volatile periods-cannot be overstated. The April 2025 stress test demonstrated how rapid position changes can amplify market swings, even as most trades remain limited-risk. For investors, the key lies in balancing aggressive theta harvesting with robust risk management. This includes strict position sizing, real-time monitoring of gamma exposure, and adapting strategies to shifting volatility regimes.

As 0DTE options continue to evolve from niche instruments to mainstream tools, their impact on market structure will likely deepen. Investors must remain agile, leveraging both institutional-grade workflows and retail-friendly strategies to harness their potential while mitigating systemic risks. In this high-velocity environment, strategic positioning is not just an advantage-it is a necessity.