Chayawat Ornthanalai (University of Toronto)

The Market for 0DTE: The Role of Liquidity Providers in Volatility Attenuation

Joint with ESCP Business School

Abstract: Option market makers’ intermediation of S&P 500 index options with zero-days-to-expiration (0DTE) lowers the index volatility, on average. Exploiting exogenous variation in contract expiration days, we show that the index volatility decreases by 60–90 annualized basis points on days with 0DTE trading. We find that market makers match most 0DTE order flows, but absorb end-users’ trades in long-dated options that eventually become 0DTE positions. Hedging these expiring positions then creates intraday order flow in the index futures that dampens volatility. The results run counter to concerns that the market makers of 0DTE options amplify volatility. Instead, their increased hedging activity has attenuated volatility of the underlying index.