One of the many ways to include options in your portfolio is to select those contracts that are very close to expiration. 0DTE options, meaning “zero days to expiration,” offer quick trading opportunities and strategies. Today, we’ll learn what 0DTE is and hint at a few 0DTE trading strategies.
Key takeaways
- 0DTE options are short-term trading instruments that expire on the same day, offering the potential for quick profits.
- They carry significant risks due to market volatility, the potential for rapid losses, and extreme time decay during the final hours of trading, making buying these contracts very risky.
- There are many ways to trade 0DTE options. You can look for a strong market opening in one direction, recent bullish or bearish news, or a technical indicator pointing towards a clear market movement.
What Is 0DTE in Options Trading?
If you stumbled upon this article, chances are you’re curious about the buzz around 0DTE options. So, what is 0DTE? The meaning of 0DTE options is “Zero Days to Expiration,” which described options contracts that expire on the day they’re traded. This feature makes them a hot topic for those having a high risk appetite.
Here’s what you should know about 0DTE options:
- Quick Expiration: Unlike standard options with longer timelines, 0DTE options have the urgency of same-day expiration.
- High-Risk (and sometimes high-reward): Perfect for traders seeking rapid gains, these options can yield substantial profits quickly, but also carry significant risks due to market volatility (if you buy 0DTE options, you can literally lose the entirety of the capital you invested, and if you sell them, you could lose even more).
- Watch Out for Time Decay: Since these contracts are about to expire, they lose value quickly as time passes. That means you generally can’t hold on to them expecting a change in the market at the last minute.
For those looking to incorporate these into their portfolios, understanding 0DTE trading strategies is crucial. You can approach this by analyzing market trends, news releases, or technical indicators for clear market direction.
Additionally, exploring 0DTE ETFs can provide further avenues for diversification (in fact, there are a few popular ETFs offering options with daily expirations, meaning there are always 0DTE contracts you can trade).
Therefore, 0DTE options offer a blend of opportunity and risk, appealing to traders who are both strategic and quick on their feet. The section below will tell you more about the specific risks involved in trading 0DTE options.
What Are the Risks of Trading 0DTE Options?
Simply put, those who buy 0DTE options can end up losing 100% of their money, while selling options can be even worse, meaning you might not even know about it until it’s too late.
The main thing to understand when trading 0DTE options is that, to make money, you need to be right immediately after you open a trade. For instance, if you expect SPY to move upward and buy ATM 0DTE calls in the morning, you need SPY to move upward right away and not in the afternoon or, worse, on the following day.
In more general terms, let us list the risks you should be aware of below:
- Expiration-Day Risks: When you buy an at-the-money call option just hours before market close and the underlying asset’s price drops, recovery is unlikely. This means your option could become nearly worthless by the end of the trading session (i.e., its extrinsic value will completely decay).
- Assignment Concerns: For sellers, there’s the risk of assignment if a buyer exercises their option before the market closes. Although uncommon, it can happen with American-style options, and you might not find out until after the market closes.
- Theta Decay: This is a big one for buyers. As time passes, the option’s extrinsic value decreases, due to a concept known as theta decay. This decay speeds up as expiration nears and can erode the option’s worth significantly, posing a major challenge for traders.
Key Risks in 0DTE Trading
Therefore, we could sum up the 0DTE trading risks as follows:
- Uncertainty: The primary risk with 0DTE options is market fluctuation. Throughout the day, options can swing from being in the money to out of it. This is tied to delta and gamma, which reflect how sensitive an option’s price is to changes in the underlying asset’s price.
- Assignment: With American-style options or ETFs that allow early exercise, you might get assigned unexpectedly. This could leave you with an unplanned long or short position after the market closes, which can be unsettling, especially if you’re new to trading.
As you can see, 0DTE trading offers both opportunities and risks. Understanding these risks, such as market uncertainty and potential assignments, is crucial for anyone looking to trade 0DTE options effectively.
How to Trade 0DTE Options?
Before looking at specific 0DTE options strategies, we need to acknowledge that trading 0DTE options isn’t typically a day-to-day activity due to its high risks and potential for substantial losses (and, in fact, we don’t do it daily). However, with careful 0DTE strategy, you can sometimes find profitable opportunities.
It’s crucial to remember that consistent trading of 0DTE options can be time-consuming and might not yield returns that justify the risks (and, even worse, you might end up losing a lot of money if the price movement you anticipated does not happen in time).
General Guidelines for Trading 0DTE Options
- Focus on ETFs: Consider starting with exchange-traded funds (ETFs) that have options expiring each day. This can provide more frequent opportunities and flexibility in trading 0DTE options.
- Weekly Stock Options: Trading options on individual stocks often occurs on Fridays when many stock options expire. This offers unique opportunities but also necessitates careful consideration of market conditions.
Trading Ideas
While we don’t recommend doing this every day, there are three triggers that may signal the potential for a good 0DTE options strategy, as the table shows:
- Price Action: Monitor the market opening. A strong move in one direction could signal a potential 0DTE trading opportunity. For example, a bullish start might suggest buying call options if indicators align, and you may use our options screener to find a trade idea.
- News Influence: Stay informed about macroeconomic reports or company-specific announcements. Positive news can drive stock prices up, making buying 0DTE call options a potential win.
- Technical Indicators: Analyze technical patterns. If a stock has been in overbought territory, buying a 0DTE put on Friday might capitalize on a possible pullback.
Trading 0DTE options requires vigilance and an understanding of market dynamics. By honing in on ETFs and stock options with the right timing, while keeping an eye on influential news and technical signals, you can craft strategies that occasionally deliver profitable outcomes. Always weigh the risks and potential rewards to ensure your trades align with your overall investment goals.
