Zero-Day Option Traders Are Betting Against Big S&P 500 Swings

(Bloomberg) -- While some investors position for AI earnings, geopolitics and interest rates to send stocks either to new highs or into a tailspin, zero-day option traders have increasingly bet that the S&P 500 Index will remain calm.

An analysis of 0DTE options flow from UBS Group AG derivatives strategist Kieran Diamond shows a marked shift toward tactical traders buying calls and selling puts when the market declines, and doing the opposite during rallies. The net effect of what they term a "counter-trend delta bias" is the equivalent of buying low and selling high, which further suppresses swings on the S&P 500.

Zero-day to expiry options have taken on an outsized importance in the daily moves of the equities gauge, with around 66% of the overall volume expiring within a day, according to Garrett DeSimone at OptionMetrics. That's increased the focus on short-term positioning as both retail and institutional traders seek insight on how options flows are influencing the $66 trillion US benchmark index.

"This counter-trend trading pattern seems to be a response to very rangebound markets," said Diamond. "The magnitude of these options flows means that this can start to look self-fulfilling, with options investors helping to limit price moves in either direction."

This intraday tactical shift since 2024 is notable, with larger volumes trading on smaller moves, helping limit S&P 500 realized volatility. The pattern resembles the stabilizing effect of positive gamma, with traders buying into dips and selling into rallies, much like option dealers who are long gamma and similarly buy declines and sell rallies to stay delta-neutral.

The counter-trend trading bias is one factor that has helped contain moves. Another is the long option-dealer gamma regime often seen in the S&P 500, much of which is driven by the prevalence of a big institutional trader selling one-day iron condors — a put spread and a call spread.

RELATED: Popular Zero-Day Trades Curb Stock Rallies: Options Watch

The growth of the 0DTE counter-trend trading flow is now so great that the net effect outweighs the impact from the option dealer re-hedging, according to UBS.