An introduction to 0DTEs An introduction to 0DTEs An introduction to 0DTEs

An introduction to 0DTEs

Saxo Group

What are 0DTEs? 

Zero Days to Expiration, or 0DTE options, may sound complex, but they are fundamentally the same as any other options contracts in the market. What sets them apart is their expiration date, which is set to occur on the same day they are traded. This unique feature compresses the timeline for potential profits or losses, making them a point of interest for traders looking for quick outcomes. 

It's worth noting that the term "0DTE" can be somewhat misleading. You can still open and close positions on these options just as you would with any other options that have longer expiration dates. In essence, they are daily options, operating within the constraints of a single trading day. The term "daily options" might be more descriptive, but "0DTE" has a certain allure that has captured traders' imaginations. 

By understanding that 0DTE options are essentially the same as any other options, just with a unique expiration parameter, traders and investors can approach them with the same foundational knowledge they would apply to other options strategies. 

Advantages of trading 0DTEs 

0DTE options have become a point of interest for a specific segment of traders and investors, and for compelling reasons. Here are some of the advantages that make these options particularly appealing.  

  • Time efficiency: With an expiration date set on the same trading day, 0DTE options offer an opportunity for quick decision-making and potentially rapid returns. This is especially advantageous for premium sellers, who can capitalize on the extremely fast theta decay. Remember: by the end of the day, your option doesn't exist anymore, meaning that what premium you received when you sold this option, you will get to keep (considering the option was sold Out-the-money and it still is at the end of the day)
  • Lower premiums: The shorter expiration timeline often results in lower premiums compared to options with longer expiration dates. KOHO-2023-09-04-00-SPX-OptionChain
  • Flexibility: 0DTE options enable traders to capitalize on short-term market movements without the long-term commitment that other options require.
  • Hedging capabilities: For investors and traders looking to hedge against intraday risks, 0DTE options provide a targeted solution. Imagine it's Tuesday and the FOMC is about to release an important inflation number. Your portfolio is positively correlated to the SPX (meaning: if the SPX goes up, the value of your portfolio is also going up to a certain degree). But you expect that the outcome of todays FOMC news release could be negative. By buying a put with today's expiration, you could hedge the possible negative effect of that news event. 

Understanding why one might engage in 0DTE options trading is crucial for assessing whether this strategy aligns with your trading or investment objectives. These advantages offer a unique set of opportunities that make 0DTE options an intriguing option for many market participants.

Risks of 0DTEs 

While the allure of 0DTE options is undeniable, it's essential to approach them with a healthy dose of caution. These options can be a double-edged sword, offering rapid gains but also posing significant risks. Here are some of the risks to be aware of:  

  • Complexity 
    Options trading is inherently complex, and the rapid time decay of 0DTE options adds another layer of difficulty. A deep understanding of options trading and its associated risks is crucial before diving into 0DTEs.  
  • Financial risk 
    The leveraged nature of options means you can lose more than your initial investment. In some cases, particularly with undefined risk strategies (naked puts, naked calls, strangles, straddles, …), losses can be substantial.  
  • Emotional toll
    The quick pace and high stakes of 0DTE options can be emotionally draining. Emotional decision-making can be your worst enemy in this fast-paced environment.  
  • Impact of market events 
    0DTE options are sensitive to market events and volatility. Even minor news can result in dramatic price swings.  

Who are 0DTE options for? 

Zero Days to Expiration (0DTE) options are versatile instruments that cater to a broad audience but are not universally suitable for every type of trader or investor. Below we identify some of the most likely candidates who could benefit from trading 0DTE options.  

  • Active traders 
    For those who thrive on the fast-paced nature of the markets, 0DTE options provide a platform for quick decision-making and the potential for rapid returns. Active traders who are comfortable with high-risk, high-reward scenarios may find these options particularly appealing. 
  • Premium sellers
    Traders who specialize in selling options for premium can capitalize on the accelerated time decay that 0DTE options offer. The quick theta decay provides an opportunity for collecting premium in a shorter time frame, making it an efficient strategy for these traders.  
  • Experienced options traders 
    While 0DTE options can be rewarding, they are best suited for those who have a solid understanding of options trading mechanics, including the Greeks, and the risks involved.  
  • Institutional investors 
    Institutional investors may find 0DTE options useful for short-term hedging or for taking advantage of specific market events. These options can complement their broader trading strategies, offering additional layers of flexibility and risk management.  
  • Risk-averse investors (with caution) 
    Interestingly, 0DTE options can also serve risk-averse investors who use them for hedging purposes. However, given the short time frame, this approach requires precise timing and should be executed with caution. It's crucial to note that 0DTE options are not recommended for beginners due to their complex nature and the rapid changes in their value.  

Before you jump into the world of 0DTE options, it's important to have a well-defined strategy and risk management plan. 0DTEs are not for the inexperienced or the risk-averse, so be sure to always keep yourself well informed of the latest market events and news so you can make the best decisions for your personal investment goals. 

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