What Are 0DTE Options?
What Are 0DTE (Zero Days To Expiration) Options?
Zero days to expiration (0DTE) options, commonly known as daily(s), are option contracts that expire every day of the week. Unlike weekly or monthly options, 0DTE options are usually found on stocks or ETFs with high liquidity. Traditional stock options contracts will have monthly expiration dates on the third Friday of each month. 0DTE options contracts expire daily vs. once per month.
- 0DTE Options are popular among day traders.
- These option contracts are usually traded on stocks or ETFs with high liquidity.
- 0DTE Options have high amounts of theta or premium decay.
- These Options are commonly sold and bought back for a lower price.
- 0DTE Options cash settle and have are not assigned if closed in the money.
How Do 0DTE Option Contracts Work?
Options contracts give the holder the right but not the obligation to exercise the contract within a certain period. The length of the option contract is dictated by the expiration date. This data can be found under the options chain in most trading platforms. As previously explained, options contracts can have daily, weekly, or monthly expiration dates.
Trading 0DTE options means that a trader purchases the options contract the same day it expires. Typically an options contract has weeks and sometimes months until expiration, providing a trader with ample time to adjust or manage positions. With 0DTE options, there is little to no room for error.
0DTE options and theta decay
When an options contract has weeks or months to expiration, theta decay may be minimal depending on how far out the date to expiration (DTE) is.
Because 0DTE option contracts are only valid for one day, their extrinsic value decays in a single trading session.
If a trader buys 0DTE options to open a position, their position will experience a high rate of theta decay, meaning that time is working against their position. Unless the underlying asset moves significantly in the direction of the trader’s favor, their position may expire out of the money, or worthless.
If a trader sells 0DTE options to open a position, such as a credit spread, theta decay is now working in the trader’s favor. In these positions, time is working in favor of the trader, and the probability of profit is significantly increased, provided the trade does not move against them.
How fast does theta decay?
Theta decay is not linear. What does this mean? It means that the rate of decay is not fixed. As an options contract approaches expiration, the rate of theta decay increases, and as a result, the extrinsic value of the options contract decreases. In layman’s terms, this means that the closer an options contract gets to expiration, the less it’s worth.
In the case of 0DTE options, the rate of theta decay increases exponentially in the afternoon trading session.
Are 0DTE option contracts profitable?
Like other option contracts, whether or not a 0DTE contract is profitable depends on the strategy employed, the chosen strike price, and the market’s direction. Because 0DTE contracts experience a much higher rate of premium decay, buying calls or puts as a directional play may result in a lower probability of the contract being in the money (ITM) at expiration. Another key component for generating profit using credit spreads is finding an instrument with high liquidity. In this case, there is no better option than SPX 0DTE. In 2022, the volume of options bought and sold on SPX options has almost tripled from 2019.
What strategy works best for 0DTE Options
One of the key features of a 0DTE options contract is the accelerated premium decay. Many professional traders use this to their advantage by employing strategies that involve the use of spreads or other theta positive positions. This is known as writing premium or selling options to open a position.
To take advantage of 0DTE options, traders want to sell a contract to open a position and buy it back after the premium has decayed. The profit earned would equal the difference between the price the contract was sold and purchased at minus commissions.
Traders who want to take advantage of theta decay in these option types would want to employ trading strategies that are theta positive. In this case, some of the most effective strategies employ spreads. An option spread is initiated when a trader buys and sells an option contract to open a position. For trading 0DTE options, traders would avoid using types of spreads with different expiration dates like calendars. Considering this, traders often use call credit spreads and put credit spreads. This allows traders to take advantage of time decay while using trades with defined risk.
John Carter’s Quick Hits strategy has been popular among options traders who want to take advantage of short-term volatility without holding trades overnight.
What Is Cash Settlement
Cash-settled options pay out in cash at expiration rather than delivering the underlying asset or security. Cash-settled options typically include index options. Cash-settled options simplify and eliminate the risk of assignment, as there are no shares of the underlying asset.
How are 0DTE SPX settlement prices calculated?
The settlement value, also known as SET, is calculated using the opening sales price in the primary market of each component security on the expiration date. The settlement amount equals the difference between the settlement value and the option’s exercise price, multiplied by $100.
0DTE options have increased in popularity among options traders as they are highly liquid, provide excellent spreads, and have a high rate of theta decay. Utilizing put credit spreads, call credit spreads, and waiting for high-probability trade setups are great ways to take advantage of 0DTE options like SPX.