Zero-Day Options Blamed for S&P 500’s Sharp Market Decline


  • The S&P 500 (SPY) has seen its largest drop in three months, largely due to the influence of zero-day options (0DTE options).
  • Tym and Zanello from Cantor Fitzgerald have illuminated the potential impact of 0DTE options on the market’s downturn.
  • Heavy trading in zero-day put options around the strike price of 4,755-4,765 was suggested as a major contributor to the market’s slide.
  • 0DTE options, overbought conditions, and a thin holiday trading environment contributed to the bearish turn on U.S. indexes.

Details of the Market Trend

The S&P 500 (SPY) recently experienced a substantial drop, its steepest in three months. Many traders are attributing this decline to zero-day options (0DTE options), which are set to expire within a day. These options have become a popular topic of debate within the derivatives market. The day was marked by inflated conditions and lower trading volumes due to festive holidays, and the influx of these fleeting put options played a substantial role in the market drop.

Impact of 0DTE Options on the Market

Matthew Tym and Paolo Zanello from Cantor Fitzgerald emphasized the potential influence of 0DTE options on the market downturn. They highlighted significant transactions in put options in the 4,755-4,765-strike price zone. Bloomberg data disclosed these puts had a notional value in billions, leading to one of the year’s highest put volumes on the S&P 500. The index fell 1.5% from an intraday high of 4,778.01 to a closing price of 4,698.35, in conjunction with an upswing in Wall Street’s volatility index, coming up from near multi-year lows.

Overview and Key Points

Here’s a snapshot of the market in the aftermath of this event – Wall Street’s rally came to a sudden halt, as the S&P 500 registered a tumble of 1.5%, the worst in three months. Traders identified “zero-day options”, short-tenure wagers expiring within 24 hours, as the decisive element in the sell-off. The bearish impact of these options, coupled with inflated conditions and light holiday trading, fueled the selling pressure.

Upon closer examination, heavy volumes of put options set to expire on December 21, amassed around the 4,765 strike price, were suspected to have initiated the market’s downward trajectory. The swift fall poses questions regarding the impact of such short-lived derivatives on market stability and the potential for negative feedback cycles.

Investor Reactions & Further Predictions

Investors are likely to respond to the sell-off leading to a probable purchase of more zero-day put options which could trigger additional selling by market makers. It’s crucial to maintain a close watch on option activities and overall market sentiment, especially during thin holiday trading. This event reignites the debate about the role of zero-day options and their potential risks to the stability of the market.

Market strategists, including Lori Calvasina from RBC Capital Market (RBC), had earlier flagged the possibility of a market pullback post a maintained rally since the end of October. Observations from Kelvin Wong at Oanda suggest that the convergence of 0DTE puts, inflated conditions, and a sparsely traded environment were likely contributors to the bearish reversal witnessed across U.S. stock indexes.

The 0DTE options phenomenon continues to be a subject of heated debate. Although these options function as a tool for hedging short-term risks and adjusting positions swiftly for institutional investors, retail investors leverage these options for making larger bets with minimal investment. Experts like Marko Kolanovic from JPMorgan (JPM) have warned about potential disruptions in the market, akin to past events like Volmageddon in 2018. However, others argue that the influence of these derivatives on the underlying market might be overstated.


In light of these market trends, traders and investors will need to consider the potential influence of such elements on their strategy, particularly in the context of forex trading. With the rising volatility from these short-term bets, potential impacts on assets like forex pairs pegged to the SPY or similar indices might be anticipated.

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