0DTE Asset Pricing

Abstract

We document new asset pricing stylized facts implied by zero days-to-expiration (0DTE) options, which now comprise half of total S&P 500 option volume, and contrast them to those of longer-maturity contracts. A distinctive feature of the 0DTE market is that investors require more compensation for positive market returns than for negative returns. This is reflected in a high variance risk premium, which is mainly driven by compensation for upside risk and negatively predicts market returns. Moreover, the majority of 0DTEs violates price bounds associated with risk-averse investors. A trading strategy exploiting these violations is highly profitable up to 2022, but dissipates after the daily availability of 0DTEs, consistent with growing integration with the underlying market in recent years. Joint paper with Caio Almeida and Rodrigo Hizmeri.

Link to paper.