The Impact of Tariffs on Stock Markets is Causing Investors to Trade Options More Riskily

Less than two months into his second term, President Donald Trump is already fueling market volatility, which has been a boon for the options market. As U.S. stocks have declined, options trading volumes have surged, according to data from Cboe Global Markets, a leading U.S. options exchange.

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Investors have increasingly turned to these derivatives to take advantage of sharp swings in major stock indexes like the S&P 500 and the Nasdaq-100. According to experts cited by MarketWatch, trading volume in S&P 500-linked options exceeded 4.8 million on Monday, the highest on record. That figure was over 50% higher than the daily average since the beginning of 2024, Cboe data showed. Contracts tied to the S&P 500 remain among the most popular in the market.

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While options activity has risen broadly, risky short-term contracts allowing traders to speculate on intraday market swings have gained particular traction. So-called “zero-day to expiry” (0DTE) options, which expire the same day they are bought, accounted for 56% of total trading in S&P 500 options in February, the highest monthly share on record. In March, they have maintained a 54% share, still significantly above 2024’s average levels.

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According to Asym 500, trading activity in the 0DTE space has reached unprecedented levels. Over the 10 days leading up to last Friday, contracts expiring at the end of each trading day averaged $1.2 trillion in notional value. These high-risk contracts are often compared to “lottery tickets” due to their potential for large payouts and their low likelihood of finishing “in the money,” meaning they can be exercised for a profit.

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Rocky Fishman, founder of Asym 500, noted that the surge in options trading over the past month isn’t surprising. Uncertainty surrounding Trump’s tariff policies, concerns about a potential U.S. recession, and doubts about America’s leadership in artificial intelligence have given investors numerous reasons to hedge their portfolios. At the same time, traders are seizing opportunities to profit from market declines. “When markets get volatile, people like trading options,” Fishman explained.

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However, as 0DTE trading activity has increased, Fishman and others have questioned whether these contracts are influencing broader market volatility. For years, analysts at major investment banks have speculated that heavy trading in these short-term options could amplify intraday market swings. Essentially, they fear that options activity might be driving broader stock price movements rather than merely responding to them.

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“We continue to wonder if strong 0DTE-buying performance has attracted more directional option buyers into the market,” Fishman wrote in a report shared with MarketWatch. He added that if this is the case, the resulting "short gamma" exposure could contribute to even more pronounced intraday fluctuations.

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In options terminology, being “short gamma” means that market makers must buy into rising markets or sell into falling ones to hedge their positions, potentially exacerbating stock moves. Market makers typically use stocks, futures, or other options to offset their risk.

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Garrett DeSimone, head quant at OptionMetrics, acknowledged that 0DTE trading could be impacting the broader market. However, he believes macroeconomic uncertainty is the primary driver of volatility, with 0DTE flows playing a secondary role.

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Beyond index-linked options, trading activity in contracts tied to individual stocks has also been climbing. OptionMetrics data shows that over the past 22 trading days, the most active options were linked to Nvidia, Tesla, Palantir Technologies, Super Micro Computer, and Apple.

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Nvidia saw an average of 4.2 million contracts traded per day, while Tesla’s options averaged nearly 2.7 million. Palantir, Super Micro Computer, and Apple followed with 1.2 million, 955,000, and 89,000 contracts, respectively.

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All five companies have experienced share price declines since early February, according to FactSet data. Meanwhile, U.S. stocks fell again on Tuesday, briefly pushing the Cboe Volatility Index (VIX) above 29. The VIX, which reflects investor expectations for near-term market swings based on S&P 500 options, tends to move inversely to the index.

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Despite this, the VIX closed just under 27 as stocks rebounded in afternoon trading on reports of a possible Russia-Ukraine ceasefire deal. The market also likely received a boost from an announcement by Ontario Premier Doug Ford and U.S. Commerce Secretary Howard Lutnick, who agreed to meet in Washington later in the week. Ford additionally stated that he would suspend a retaliatory surcharge on electricity exports to several U.S. states.

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Later in the day, Trump told reporters he would “probably” reduce tariffs on Canadian steel and aluminum after initially doubling them earlier.

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Despite the late-session recovery, the S&P 500 ended the day down 42.49 points, or 0.8%, at 5,572.07. Earlier in the session, it had dropped over 1% and briefly approached correction territory, defined as a decline of 10% or more from a recent high. The Nasdaq Composite slipped 32.23 points, or 0.2%, to 17,436.10, while the Dow Jones Industrial Average fell 478.23 points, or 1.1%, to 41,433.48. The S&P 500’s most recent record high was reached on February 19.

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