As trading volumes for zero-days-to-expiration (0DTE) S&P 500 index options skyrocket, so does the anxiety that these instruments could trigger a "volamageddon" style market meltdown. A recent study by Amaya et al. (2025) puts these fears to the test, investigating whether the hedging activities of options market makers (OMMs) actually destabilize the S&P 500.
The Theory: How Hedging Impacts the Market
The concern centers on gamma. When market makers hold "negative gamma" positions (often from selling options to customers), they must rebalance their hedges by selling as the market falls and buying as it rises. In theory, this "chasing" behavior can exacerbate price swings and increase volatility. Conversely, "positive gamma" positions—where OMMs buy low and sell high—can actually dampen market movements.
Key Findings: High Impact, Low Frequency
Using proprietary trade data from Cboe, the researchers modeled the relationship between OMM gamma and S&P 500 volatility from July 2020 to June 2023. Their findings reveal a more nuanced reality:
Usually Stabilizing: Most of the time, OMMs hold positive gamma positions, meaning their trading typically reduces market volatility.
The "Maximum" Impact: When OMM gamma does turn negative, volatility spikes. The study found that at its peak impact, OMM hedging increased annualized daily realized volatility by 3.3 percentage points.
Intraday Swings: For 30-minute windows, the maximum impact was even higher, increasing annualized volatility by 6.4 percentage points.
Is This a Cause for Alarm?
While a 3.3 or 6.4 point jump sounds significant, the researchers put it into perspective:
Daily changes in annualized volatility of 3.0 percentage points or more occur about once a week due to various market factors.
The maximum 30-minute impact (6.4 points) is still far below the maximum historical volatility shifts (which can reach 63.4 points).
The Verdict
The study concludes that while 0DTE options do impact market volatility, the magnitude of this impact is not unusual or extreme when compared to normal market fluctuations. While "gamma squeezes" are a real mechanical phenomenon, they are currently a manageable part of the market’s broader rhythm rather than a constant existential threat.