The S&P 500 has gone almost nowhere since June, and a UBS team points to options trading as one possible explanation. Traders of same-day options increasingly bet against the market's daily direction, which has likely helped stifle momentum.
The S&P 500 closed at 7,676.77 on Monday, only about 1% above its June 1 finish of 7,599.96. According to a team of trading-desk analysts at UBS, options traders have taken over a leading role in price discovery, and their behavior may help explain the narrow range.
A flat index despite heavy news flow
On a rolling 50-day basis, the index's trading range looks conspicuously narrow. That stands out because investors faced a nonstop flurry of market-relevant events over the past few months: the Iran war dragged on, Treasury yields touched their highest levels in decades and the Federal Reserve returned to raising interest rates.
Worries about the eventual returns on enormous artificial-intelligence investment also weighed on semiconductor stocks and other AI-related plays.
Same-day options trade against the market
UBS studied options order-flow data from the Cboe and found that traders of zero-days-until-expiry (0DTE) options increasingly trade in the opposite direction of the market. When the index is higher on the day, these traders pile into 0DTE puts or sell 0DTE calls. When it is lower, they buy 0DTE calls and sell 0DTE puts.
That marks a big change from 2024, when 0DTE order flow showed little relationship to recent moves in the spot market. The UBS team says the growing popularity of this countertrend strategy has likely helped stifle the index's directional momentum.
Options volume now outweighs futures
Adjusted for each contract's sensitivity to moves in the underlying index, daily gross volume in S&P 500 options has eclipsed E-mini S&P 500 futures volume by roughly 1.7 to one, UBS found. OptionMetrics data showed that S&P 500 0DTE trading peaked at a record high of 75% of total daily volume in the index complex earlier this year, and has routinely ranged between 60% and 70% since the start of the summer.
Garrett DeSimone, head of quantitative research at OptionMetrics, said hedging tied to this activity could be one factor suppressing intraday moves. He added that a market split between AI stocks and everything else could also dampen swings, and that this setup lends itself to lower correlation and lower volatility at the index level.
Source: MarketWatch
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