0DTE Options and Intraday Volatility

Abstract

We study whether the recent rise in trading of zero-days-to-expiry (0DTE) options on the S&P 500 Index is related to the intraday volatility of the underlying. We focus on the canonical Market Maker Delta-hedging channel induced by Gamma exposure, which the literature has commonly invoked to explain how options trading can affect the underlying index. In this framework, Market Makers with positive (negative) inventory Gamma tend to sell (buy) after positive returns and buy (sell) after negative returns, thereby potentially stabilizing or destabilizing intraday price dynamics. Although several studies find that Market Makers’ net inventory Gamma tends to be positive and that the high Gamma intensity of 0DTE options has, on average, attenuated intraday volatility, others document a positive association between greater 0DTE activity and higher volatility. We test directly whether the hedging feedback mechanism is itself quantitatively strong enough to explain variation in intraday volatility. We derive a structural variance mapping from a price-impact framework in which order flow is decomposed into exogenous trading flows and endogenous dealer hedging flows. Our empirical results show that the canonical hedging feedback channel does not add meaningful predictive power for intraday variance forecasts on either a Quasi-Likelihood (QLIKE) loss or Pearson and Spearman correlation basis, whereas other option risk exposures exhibit substantially stronger predictive power beyond standard volatility benchmarks. We conclude that although 0DTE trading is related to intraday volatility, the evidence does not support the canonical Gamma-induced hedging feedback channel as the primary mechanism behind that relationship.