UBS: Zero-day options suppress S&P 500 volatility

UBS analysis indicates that zero-day options (0DTE)—contracts expiring within a single day—are currently acting as a stabilizing force for the S&P 500. Investors are engaging in counter-trend trading, buying call options when the index falls and buying put options when the index rises. This behavior tends to limit price swings and keep the index within a narrow range.

Approximately 66% of S&P 500 option volume is now concentrated in these ultra-short-term contracts. UBS derivatives strategist Kieran Diamond noted that this trend creates a self-reinforcing effect that suppresses actual market volatility. This mechanism is similar to a ‘long gamma’ environment, where market makers manage risk by buying during dips and selling during rallies.

However, experts warn this stability could reverse during significant market downturns. If a prolonged sell-off occurs and investors shift toward trend-following behavior—buying put options to bet on further declines—the current volatility-suppressing structure could collapse. Such a shift would likely amplify price drops and increase the hedging burden for market makers. Unlike the S&P 500, options in the technology and semiconductor sectors have shown a tendency to reinforce intraday trends rather than suppress them.