HOW RISKY ARE ZERO-DAY-TO-EXPIRY (0DTE) OPTIONS?
The warning signs are familiar: skyrocketing volumes, growing interest from retail investors, and bloggers competing with professionals for attention. As zero-day-to-expiry (0DTE) options take the spotlight, some are questioning whether we’re headed for a repeat of the 2018 “Volmageddon.”
Key Takeaways
· The 0DTE options market is expanding rapidly, driven by increased visibility and a wider array of available contracts, prompting both excitement and concerns of a possible volatility shock.
· A close analysis of market behavior suggests that directiona
· l intraday traders are fueling demand, while systematic sellers of volatility are stepping in to provide liquidity.
· Though comparisons to 2018’s Volmageddon have emerged, it’s important to understand the nature of 0DTE options and the actual systemic risks they may (or may not) introduce.
THE SURGE IN POPULARITY MEETS MARKET ANXIETY
Interest in 0DTE options—contracts that expire on the same day they’re traded—has surged dramatically, appealing to both retail and institutional investors. As the media hypes them up, concerns have risen too, particularly when recalling the market turmoil of February 5, 2018, when the VIX jumped by 20 points and nearly 90% of short-volatility ETFs were wiped out.
The market share of 0DTE options has grown significantly, especially for those tied to the S&P 500 Index, rising from just 5% in 2016 to over 40% by early 2023. While this kind of media frenzy is to be expected during trading booms, it raises a fair question: Is the fear of major volatility justified?
RETAIL TRADERS TAKE THE LEAD
A pivotal moment came in April and May 2022 when the CBOE added Tuesday and Thursday expirations to the existing Monday, Wednesday, and Friday lineup. This move helped inflate trading activity mechanically (see Figure 1).
But examining volume alone isn’t enough. Deeper analysis reveals several clues pointing to retail dominance in this space:
1. Smaller trade sizes are more prevalent than in longer-term options.
2. Single-leg trades make up over half of all 0DTE activity, compared to multi-leg setups being more common in longer-dated options (see Figure 2).
3. Call and put volumes are fairly balanced.
4. Buying activity tends to happen earlier in the day (at or near the ask), while selling occurs later (at or near the bid).
Although institutions also participate, retail traders seem disproportionately active in 0DTE trading compared to other areas of derivatives markets.
These contracts are often used for making quick directional bets—bullish or bearish—leveraging high risk for potentially high returns. On the other side of these trades, systematic volatility sellers offer liquidity.
At the time of this writing, pricing data suggests that the 0DTE market is relatively well-balanced, with no clear supply-demand distortions.
DANGEROUS DAYS VS. DEADLY DAYS
Can these contracts lead to localized imbalances in dealer positioning—particularly short gamma—that amplify price swings? Yes, but their impact is likely to be brief. Two main reasons support this view:
1. With expiry occurring the same day, gamma risk is short-lived and dissipates quickly as prices move away from strike levels.
2. Most 0DTE buyers lock in gains early, exiting positions before expiry, which helps counteract the short gamma momentum by taking the opposite side of prevailing trends.
Importantly, even if a sharp move punishes 0DTE sellers, the fact that they start the next day flat—with no leftover positions—limits the damage. A single bad day isn’t catastrophic. What’s truly dangerous is a bad day followed by a larger exposure the next morning—a hallmark of short convexity.
IS A VOLMAGEDDON REPEAT LIKELY?
What triggers crises in derivatives markets isn’t necessarily trade volume—it’s inventory buildup. Risk accumulates when dealers are forced to warehouse large positions to act as counterparties. But by nature, 0DTE options don’t generate long-lasting inventory.
This dynamic is very different from the Volmageddon episode, which stemmed from the leveraged buildup in inverse VIX ETNs. These products moved in the opposite direction of the VIX short-term futures index. As volatility spiked, ETNs rebalanced by buying VIX futures, which further fueled the volatility rise in a self-reinforcing loop, ultimately wiping out the products' value.
While 0DTE trading could create short gamma situations where hedging requirements exacerbate moves, this would require a rare confluence of events: a large, rapid market shift not caused by 0DTE trading, occurring during a moment of significant imbalance in the 0DTE market.
In contrast to Volmageddon, the liquidity available in S&P 500 futures markets today appears much greater than what existed in the VIX futures market in 2018 relative to ETN needs. This makes the kind of feedback loop seen then far less likely.
CONCLUSION: IS 0DTE THE NEXT VOLMAGEDDON?
While 0DTE options can intensify short-term market moves, their limited lifespan, localized impact, and lack of inventory buildup make them fundamentally different from the instruments that triggered the 2018 crash.
Given the current equilibrium in the market, the broader liquidity environment, and the nature of the contracts themselves, it seems improbable that 0DTE options would lead to a systemic breakdown akin to Volmageddon. Their influence may result in turbulent single-day moves—but the risk of triggering a financial meltdown appears remote.
March 2023
Updated version as of May 2025