Zero-day options are quietly capping S&P 500 rallies

A new wave of ultra-short-dated option trading is increasingly shaping how the S&P 500 moves during the day, and analysts say it may be putting a ceiling on stock market rallies, Bloomberg reports. Zero-day options and other one-to-five-day contracts have exploded in popularity this year, turning what used to be niche trades into one of the biggest forces in US equity markets.

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A flood of daily option-selling is changing intraday behavior: Investors have been selling more short-dated options to collect steady premiums. These trades are designed to profit if markets stay in a narrow range, but they also create mechanical pressure in the underlying index.

The last 30 minutes of trading are becoming a pressure point: Hedging flows spike as options approach expiration near the closing bell. On 24 October, dealer gamma peaked at about USD 90 bn roughly 10 minutes before market close. At that moment, even a 0.1% move in the index would have forced around USD 10 bn in hedging flows, according to UBS estimates.

Some see trading opportunities in these distortions, others aren’t convinced: The growing influence of short-option strategies has encouraged some traders to buy one-day options at the close and sell them at the next morning’s open, hoping to exploit overnight gaps. But skeptics warn against overstating the importance of any single strategy. “Of the 25 or so different things that are pushing markets in different directions, this is one of the 25,” said Susquehanna’s Chris Murphy. “It gets more attention than it deserves.”

And the sustainability question remains open: Many of these trades rely on stable, low-volatility conditions — something that rarely lasts forever. “Any systematic short-option strategy generally harvests premium pretty well until a high volatility environment realizes and then it kills the trade via convex losses,” said Garrett DeSimone of OptionMetrics.

MARKETS THIS MORNING-

Asian markets are mostly in the red in early trading this morning as traders adopt a cautious approach ahead of a busy week for earnings. Japan’s Nikkei, the Shanghai Composite, and the Hang Seng are all down 0.5%. Meanwhile the Kospi is in the green, up 1.7%.

THE CLOSING BELL-

The ADX fell 0.4% on Friday on turnover of AED 849.7 mn. The index is up 5.3% YTD.

In the green: Agthia Group (+6.6%), Eshraq Investments (+3.9%) and Gulf Cement Co. (+3.2%).

In the red: ADCB Rights Issue 2025 (-12.5%), Aram Group (-6.7%) and Presight AI Holding (-6.6%).

Over on the DFM, the index fell 0.7% on turnover of AED 673.3 mn. Meanwhile, Nasdaq Dubai was down 0.9%.

CORPORATE ACTIONS-

Dubai-listed shipping and maritime services firm GulfNav’s shareholders approved a 51% capital increase to AED 1.65 bn to fund its planned acquisition of Fujairah storage business Brooge Energy, according to a disclosure (pdf). The increase will come through AED 500 mn worth of bonds to be priced at AED 1.1 per bond and issued to existing shareholders. The bonds can be converted into shares within three months.

The capital increase also includes 358.8 mn new shares for Brooge with a one-year lock-up period and the issuance of AED 2.3 bn in mandatory convertible bonds for Brooge shareholders.

The capital increase has already been cleared by the Securities and Commodities Authority and will be activated on 21 November after trading hours. Trading will begin on 24 November.

REMEMBER- GulfNav announced closing an AED 3.2 bn acquisition of Brooge Energy in May, issuing 358.8 mn new shares and AED 2.3 bn in convertible bonds to Brooge, plus AED 500 mn in bonds to shareholders. GulfNav’s shares gained 8.97% at the time to end at AED 5.95.