A trading strategy centered around "zero-day options" (also known as 0DTE options), where investors sell daily options, is gaining traction in global equity markets. This trend could make it difficult for stocks to sustain the record-breaking rally seen since mid-April. While the so-called "AI bubble narrative" since November has dampened bullish sentiment—particularly toward key drivers of the 2023 bull market, such as Nvidia, Google, TSMC, Broadcom, and Micron—the real market-moving force lies in the granular trading dynamics of these high-risk, short-term options.

Market makers' hedging demands (e.g., gamma hedging) have become a direct and foundational mechanism influencing broader market trends. Recent investor-led strategies, such as selling call options instead of puts, are exerting significant pressure on any stock market rebound. Notably, the "Iron Condor" strategy—favored by retail traders—involves selling call spreads above the current market level and put spreads below it, which could persistently and sharply impact near-term price action.

Since 2025, option-selling strategies have proliferated, spanning ETFs, systematic zero-day expiration trades, and quant-driven hedge fund approaches. Meanwhile, market makers typically rebalance their positions by selling options during rallies and buying them during pullbacks. This visible drag effect tends to weigh more heavily on upside moves than declines, according to Bram Kaplan, a senior derivatives strategist at JPMorgan.

UBS Group AG's strategists highlight that one particular zero-day options tactic—the Iron Condor—has grown especially popular among retail traders. As major indices like the S&P 500 face resistance near record highs, both institutional and retail investors are increasingly turning to ultra-short-term volatility windows for risk management. Trading volume for options expiring within 0–5 days has surged, with zero-day expiries alone accounting for a staggering 60% of S&P 500-linked activity.

Zero-day options, which expire on the same trading day, are characterized by extreme time-value compression, high leverage, and outsized risk. Their rapid adoption (now 60% of U.S. options volume) means even small premium changes can sway large underlying positions. If the underlying asset moves sharply intraday, gains or losses amplify dramatically. Conversely, misaligned bets can quickly wipe out the option’s value.

The Iron Condor strategy—selling call spreads above and put spreads below the current market price—has fueled a surge in retail participation. UBS derivatives strategist Kieran Diamond notes that S&P 500 zero-day options, particularly via short Iron Condors, may be partly suppressing recent equity rebounds. "These 1DTE or shorter Iron Condors now leave a visible footprint in S&P 500 option positioning, potentially distorting underlying price action," Diamond said.

The strategy aims to collect premiums if markets stay range-bound. Market makers, who take the other side of these trades, face mounting hedging pressure as prices approach critical strike levels—especially in the final 30 minutes of trading. UBS data shows widening spreads between strikes in recent months. While 0DTE gamma exposure shifts intraday, most liquidity stems from active option selling. Market makers’ positions grow most extreme near upside call strikes, where lower volatility amplifies gamma’s hedging impact per contract.

"The biggest risk lies to the upside," Diamond explained. "S&P 500 market makers must manage massive long gamma exposure from call sales, forcing them to sell equities as indices near strikes—making further rallies increasingly difficult intraday."

**The "Butterfly Effect" of 0.1% Moves Triggering $10B Flows** Hedging liquidity estimates, based on market makers’ peak gamma 10 minutes before the Oct. 24 close, reveal how S&P 500 gamma can spike exponentially near settlement. That day’s close exemplified extreme conditions: gamma hit ~$90 billion, meaning a mere 0.1% spot move would trigger ~$10 billion in market flows. While futures markets absorb such shifts, price distortions persist.

Theoretically, post-close sessions (e.g., in Asia or Europe) could see gaps higher as hedging demand vanishes. "In October, markets struggled to break through gamma-heavy zones during regular hours but often rebounded after closes as expired options freed up price action," Diamond noted. This may create arbitrage opportunities—like buying 0DTE options at the close and selling at the next open.

However, some question the lasting impact of systematic option-selling. "Among 25 factors driving markets, this is just one," said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, arguing it’s "over-scrutinized." Others doubt the sustainability of retail-driven short-vol strategies. "Systematic short-option approaches thrive in low-vol regimes but implode during volatility spikes due to convexity losses," warned Garrett DeSimone of OptionMetrics. "Even with robust risk models, investors may capitulate amid prolonged drawdowns."