0 DTE options strategies, which utilize options that expire on the same day, have recently gained significant popularity.
These strategies have been feasible for some time, with SPX offering daily expirations and RUT offering expirations three times per week.
0 DTE options, also known as same-day options or daily options, are a type of options contract that expires at the end of the trading day on which they were purchased.
This means that the contract has a lifespan of zero days to expiration (DTE).
Unlike traditional options that have longer expiration periods ranging from a few days to several months or even years, 0 DTE options offer a very short-term trading opportunity.
They are typically used by traders looking to take advantage of small price movements in the underlying asset over a very short period, usually within the same trading day.
Because 0 DTE options have such a short lifespan, they are generally more risky and volatile than longer-term options due to the high gamma.
Gamma is the rate of change of delta.
During the last few minutes before expirations, a very small change in price can make the difference between having a max gain or a max loss in the option position.
Any unexpected market movements can quickly erode the option’s value.
If zero DTE options are so volatile, why are so many people gravitating to them?
High gamma can be a disadvantage, as we have described above, but it can also be an advantage.
Short-term directional traders who are good at reading the directional moves of the market buy options to take advantage of high gamma that would accelerate their profits.
For example, by owning a call option with positive gamma, the trader will benefit from upward movements in the underlying asset price.
As the option’s delta increases, this leads to an even larger profit potential.
On the other hand, if the underlying asset price moves against your position, the option’s delta will decrease, leading to a smaller loss potential.
Short-term options are also less expensive to buy than longer-term options.
Hence these zero DTE strategies attract traders with small accounts.
By not holding the position overnight, traders avoid gap risk in the underlying assets.
On the flip side of the coin, there are also zero DTE option sellers.
If the market day is trending in one direction, they can sell a credit spread to play that direction as well as capture the theta decay of options during the last day of expiration.
They may use an iron condor or butterfly if the market day is range-bound.
Either way, they are taking advantage of options’ accelerated decay rate on the expiration day.
The high implied volatilities post-Covid may have made the environment conducive to selling 0 DTE options to capture time decay.
But when the market environment changes and implied volatility drops, will 0 DTE trades be more difficult? And will people lose interest?
Merriam-Webster dictionary defines “fad” as “a practice or interest followed for a time with exaggerated zeal.”
John Locke thinks it is a fad since I heard him use that word at least twice in episode 102 of The Winning Trade.
He is not unfamiliar with trading on the expiration day.
In many of his videos, he showed trades that are taken to expiration, and he showed a zero DTE trade in the above-mentioned episode.
He said in March 2023 that he got more questions about 0 DTE in a week than the entire time he has been coaching.
Others think zero DTE is here to stay.
There were many things that people once thought was a fad when they first appeared. However, many of these so-called “fads” have stood the test of time and are here to stay.
When Netflix started sending movie CDs to people’s homes, they called it a fad.
Now it has become a streaming service for which nearly everyone has an account.
Organic produce and gluten-free foods were initially called a fad; they are now abundant in grocery stores.
Yoga, when first introduced, was called a fad. Its popularity is now a mainstay of many cultures.
The zero DTE philosophy reflects the modern culture of speed and instant gratification.
The modern generation says that we have no time to wait a month to see if our trade plays out.
We want to know now, and we want to collect our reward today.
We no longer send emails.
Instead, we text.
We no longer use ovens; they are too slow.
We use air fryers, microwaves, and instant pots.
The modern lifestyle has eliminated our ability to have patience.
Microwaves are not cooking our foods fast enough – two minutes to prep food is too long.
With the high traction rates of these 0 DTE strategies, the staying power of this so-called “fad” will be difficult to dismiss.
In early 2023, it seems that everyone is jumping on the bandwagon.
CNBC’s media piece on February 17, 2023, titled Volmageddon 2.0: How Options are Influencing Markets, says that zero DTE options are now estimated to make up about 50% of the daily volume of the S&P 500 index options.
Wall Street Journal and other media are talking about zero DTEs.
SimplerTrading is blogging about it.
TastyLive has a series of videos on zero DTE on YouTube.
Even educators that never talked about short-term trading are now talking about it. For example, Sheridan Mentoring has a class called Same Day Iron Condors.
Aeromir has an SPX 0 DTE trade alert service as well as a 0 DTE workshop that covers various strategies.
Zero DTEs are being talked about by Sasha Evdakov, Matt Giannino, SMB Capital, and on BarChart, plus many others.
Ernie Varitimos owns the website 0 DTE.com, which implies that he is one that thinks zero DTE is here to stay.
Do you think zero DTE is here to stay?
Personally, I think 0 DTE is here to stay.
The genie is out of the bottle, and it’s not going back in.
Are Zero DTE trades recommended for new traders?
Zero DTE options are generally not recommended for inexperienced traders or those who are not comfortable with taking on higher levels of risk.
Unlike longer-term trade, taking a max loss on zero DTE trades is easy.
Hence, the trader needs to have a proper position size.
Options expiring on the same day can get very exciting.
So the trader needs to be able to manage emotions and has a trading plan in place for every contingency.
A trader needs to have a certain level of skill set to navigate zero DTE trades successfully.
It is easier to build that skillset on slower moving longer-term trades first.
How can we backtest zero DTE strategies?
You need a program that has historical intraday option price data.
End-of-day data will not be sufficient.
One such software is OptionNet Explorer, which has data at 5-minute intervals during the trading day.
While it will not automate a trading strategy, you can use it for manually backtesting a strategy.
There are some clear advantages to zero DTE options.
They are in line with the philosophy of trading small and trading frequently.
When traded correctly and with skill using a strategy with an edge that exploits the characteristic of options near expiration, they can offer the potential for high returns.
Trading small keeps the drawdown small.
Trading frequently allows the statistics of positive expectancy strategies to play out.
The shorter turn-around in capital usage can generate higher percentage returns than longer-term trades.
However, the P&L can swing wildly on these trades, and one can easily take a max loss.
It is important to thoroughly research and understand the risks and potential rewards of 0 DTE options before deciding to trade them.
We hope you enjoyed this article about 0 DTE options.
If you have any questions, please send an email or leave a comment below.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.