What Are Zero-Day Expiration(0DTE) Options? How Do They Affect U.S. Stock Market Volatility Including VIX Index?

TradingKey - In recent years, whenever the U.S. stock market experiences sharp volatility, it not only sees a rise in the VIX Index but also a surge in trading of zero-day-to-expiration options (0DTE). These instruments have frequently been blamed by media outlets for exacerbating market swings.

Zero-day options gained significant popularity, at one point accounting for over 50% of total trading volume in S&P 500 index options.

J.P. Morgan has warned that in extreme scenarios, zero-day options could intensify an intraday 5% drop in the S&P 500 to a 25% plunge—a level of collapse unseen even during the 1987 Black Monday crash.

In early 2025, following President Donald Trump’s announcement of new tariff policies on "Liberation Day," the U.S. stock market tumbled into a technical bear market. Once again, zero-day expiration options came under the spotlight as analysts said that such trades amplified volatility in the S&P 500.

What Are End-of-Life Options?

Options are financial derivatives that give holders the right—but not the obligation—to buy or sell an underlying asset at a specified price on or before a certain date. The seller of the option, however, is obligated to fulfil the transaction if the buyer chooses to exercise their rights.

"Zero-day-to-expiration options" (0DTE) share the same fundamental elements as other option contracts—underlying asset, strike price, expiration date, and premium—but their expiration date is the same day as the trade.

Given this ultra-short time to maturity, investors rarely have the opportunity to exercise their rights to buy or sell the underlying asset. Broadly speaking, end-of-life options include those with very short maturities, typically one or two days.

The term "end-of-life" also stems from the "Volmageddon" in February 2018—a blend of "volatility" and "Armageddon"—when a spike in short-term options trading contributed to a 10% drop in the S&P 500 over two weeks.

An option’s value is composed of intrinsic value and time value. Generally, the shorter the time to expiration, the lower the time value, which results in cheaper premiums. Thus, the pricing of 0DTE options depends heavily on the intrinsic value of the underlying asset. In-the-money (ITM) options carry intrinsic value, while out-of-the-money (OTM) and at-the-money (ATM) options rely primarily on time value. Profitability is determined by whether exercising the option would result in a financial advantage.

• Out-of-the-Money (OTM): Call options where the asset price < strike price; put options where the asset price > strike price.
• In-the-Money (ITM): Call options where the asset price > strike price; put options where the asset price < strike price.
• At-the-Money (ATM): Asset price = strike price.

For example, if SPY (SPDR S&P 500 ETF) is trading at $500:

• A call option with a strike price of $490 is ITM, allowing the holder to buy the asset at $490 and sell it at $500, resulting in a $10 profit.
• A call option with a strike price of $510 is OTM, meaning it would result in a loss if exercised. Typically, buyers allow such options to expire worthless, incurring only the loss of the premium paid.

After expiration, OTM options become worthless, while ITM options are automatically exercised. Trading 0DTE options requires precision in timing and directional accuracy due to their ultra-short lifespan, making them particularly attractive to speculative day traders.

Characteristics of 0DTE Options

0DTE options are characterised by extremely short durations, rapid time decay, high leverage, and potentially limited liquidity. These features make them highly risky, yet appealing to certain traders.

1. Extremely Short Duration
   0DTEs have extremely short lifespans, with their prices almost entirely driven by intraday market movements.
2. Rapid Time Decay
   As expiration approaches, time value diminishes rapidly, causing option prices to react more sharply to market fluctuations. Since 0DTEs expire on the same day, they possess virtually no time value.
3. High Leverage
   Due to low premiums and significant Gamma effects, 0DTEs can amplify gains or losses with minimal capital. According to Bloomberg, a $1 investment in a 0DTE option can equate to a $1,000 stock position.
4. Asymmetric Risk-Reward
   Buyers have unlimited upside potential with limited downside risk (equal to the premium paid), while sellers face unlimited downside risk with limited upside (equal to the premium received).
5. Potential Liquidity Constraints
   While popular among short-term traders, deep ITM or OTM options nearing expiration can suffer from low liquidity, making quick trades difficult.

Why Are 0DTE Options So Popular?

The popularity of 0DTEs stems from their high leverage, which allows investors to amplify gains from market volatility at a relatively low cost.

1. Low Premiums
   Option prices reflect time value, which declines sharply for 0DTEs due to their ultra-short duration. As a result, they are cheaper to trade—much like discounted goods approaching their expiration date.
2. Gamma Effect Amplifies Price Swings
   High Gamma values indicate that even small changes in the underlying asset’s price can lead to significant shifts in the option’s value. While Delta measures an option’s sensitivity to price changes in the underlying asset,  Gamma reflects how Delta itself changes. As expiration approaches, Gamma is likely to spike, magnifying price movements.

Why Do Investors Favor 0DTE Options?

Introduced in 2005 as Weekly Options, 0DTEs gained traction during the COVID-19 pandemic in 2020 and the meme-stock frenzy of 2021. 

Retail investors favor their low cost and high leverage, while institutions use them for hedging, delta-neutral strategies, or event-driven speculation (e.g., earnings reports, Fed meetings).

Buyer vs. Seller Logic in 0DTE Options

• Buyers: Use a "lottery ticket strategy," betting on short-term volatility with minimal capital and limited downside (premium paid).
• Sellers: Adopt a "cigarette butt-picking” strategy,  selling deep OTM options, hoping they expire worthless and pocketing the premium. While this approach yields small but frequent gains, it carries the risk of catastrophic losses.

Do 0DTE Options Exacerbate Market Volatility?

Opinions differ. J.P. Morgan warns that 0DTE  options act as a "ticking time bomb," amplifying volatility through concentrated trading, frequent hedging, and panic-driven behaviour. Conversely, firms like Bank of America argue their impact is overstated, citing the stabilising effects of market makers’ hedging activities.

How Do 0DTE Options Interact with the VIX?

Whenever market volatility intensifies, 0DTE options and the VIX index are often singled out. During periods of market panic, they can sometimes influence one another. Notably, however, the VIX index does not measure the volatility of zero-day-to-expiration options.

1. Impact on VIX
   Rising Gamma and hedging needs near expiration boost implied volatility, pushing the VIX higher.
2. VIX Impact on Pricing
   A rising VIX increases implied volatility, boosting 0DTE prices and attracting traders.
3. Market Maker Behaviour
   As expiration approaches, heightened Gamma forces market makers to adjust hedges frequently, amplifying volatility reflected in the VIX.