Trading 0DTE's: getting your feet wet, without drowning - part 2 Trading 0DTE's: getting your feet wet, without drowning - part 2 Trading 0DTE's: getting your feet wet, without drowning - part 2

Trading 0DTE's: getting your feet wet, without drowning - part 2

Options 10 minutes to read
Koen Hoorelbeke

Options Strategist

Summary:  This article is the second part of our Zero Days to Expiration mini-guide. In this final part we take a closer look at more advanced topics as risk management, option selection and we provide you with a checklist and a couple of examples to get you going. Whether or not you choose to trade those 0dte's, by the end of this guide, you should have a well-rounded understanding that empowers you to make informed decisions on whether 0DTE options trading fits into your investment or trading strategy.

0dte's - getting your feet wet, without drowning - part 2

Welcome back to the second part of our deep dive into 0DTE options trading. In the first installment, we explored the essentials—what 0DTE options are, their historical context, the types of traders who are best suited for them, and the various strategies you can employ. If you haven't read the first part yet, I highly recommend doing so as it lays the groundwork for the advanced topics we're about to cover.
As we transition into this next phase, our focus will shift from the foundational concepts to the nitty-gritty details of effective risk management, choosing the right options, and executing trades. Risk management, in particular, is a pivotal aspect that can make or break your trading experience. So, without further ado, let's delve into the multifaceted world of risk management in 0DTE options trading.


9. Risk management

Navigating the volatile landscape of 0DTE options requires a robust risk management strategy. Without it, even the most promising trades can turn sour quickly. Below are some essential considerations:

Trade size

Position sizing is commonly tailored to match a predefined maximum loss. For instance, if you're not willing to lose more than $1,000, you might look at how many contracts you can trade such that the maximum loss would not exceed this amount. If one vertical spread has a maximum loss of $350, you would ideally open no more than 3 contracts, risking a total of $1,050. However, especially for those new to 0DTE options, starting with the minimum number of contracts (usually one) is advisable. While this might be below the risk level your account can technically handle, it allows you to gain valuable experience while risking a smaller amount. This approach prioritizes learning and minimizes the emotional toll of a potential loss.

Capital allocation

A common practice is to allocate around 1% of your total account value, including existing positions, for a single trade or position. For example, with a $100,000 account, this would translate to a maximum loss of approximately $1,000 per trade. This 1% rule is designed to allow for a series of losing trades without critically damaging your account. Think of it as ensuring you have enough "lives" to continue playing the trading "game." For smaller accounts, say $10,000, adhering to this 1% rule can be challenging. In such cases, traders often allocate up to 5% of their account value per trade. While this increases the risk, it also necessitates being more selective and cautious in trade selection.

Margin utilization

When selling premium, it's crucial to consider margin utilization. This is a complex subject that warrants its own dedicated article, which I'll address in the future. For the scope of this article, a good practice is to not exceed 50% margin utilization. This provides you with some "wiggle room" for unforeseen events that might cause spikes in margin requirements, thereby helping you avoid margin calls.

Stop-losses on short legs

Sometimes, relying solely on the maximum loss of a strategy isn't practical. For example, if you have a vertical spread with long options that are $20 away from the short options, your maximum loss could be substantial. In such cases, you can set a stop-loss or a stop-limit on your position. This ensures that if the trade starts going against you beyond a certain point, an order will automatically trigger to exit the position before the loss becomes unbearable. Since most trading platforms currently don't allow setting a stop-loss on an entire strategy, a workaround is to place a stop-loss on the short leg of the strategy. A common practice is to set the stop-loss at three times the premium received on the short leg. If you received $1 on the short leg, you'd set a stop-loss or stop-limit at $3.

Risk-to-reward ratio

The risk-to-reward ratio is a critical metric that varies depending on the strategy's probability of profit (POP). For high-probability strategies, which typically have a POP of 80% or higher, a commonly targeted risk-to-reward ratio is 3:1. This means you're willing to risk $3 to make $1, reflecting the strategy's higher likelihood of success.
On the other hand, low-probability strategies, such as a call butterfly with a POP of 30%, often aim for an inverse risk-to-reward ratio, like 1:9. In these scenarios, one successful trade often has to compensate for multiple unsuccessful ones. The skewed risk-to-reward ratio accounts for the lower frequency of winning trades and aims to ensure that the gains from the successful trades significantly outweigh the losses from the unsuccessful ones.

Psychological preparedness

The fast-paced nature of 0DTE trading can lead to emotional decision-making. Being mentally prepared to stick to your strategy is crucial. It's good practice, and at times imperative, to be fully prepared for any scenario. Utilizing stop-loss and take-profit orders allows for a "set it and forget it" approach, minimizing the chance of emotional errors and enabling more mechanical trading.
Effective risk management is not just about avoiding losses but also about maximizing the efficiency of your capital. By paying close attention to these factors, you can navigate the complex world of 0DTE options more confidently and effectively.
10. Choosing the right options
Selecting the appropriate 0DTE options is no small feat and requires a thorough understanding of various factors. Here are some of the key considerations:

Underlying asset

Selecting the right underlying asset for your 0DTE trades involves more than just a cursory glance at a list of available products. Your choice will be influenced by multiple factors, such as the type of options (American vs European), the asset class (ETF vs Index), and your knowledge of specific economies or sectors. For instance, are you more acquainted with the US or European markets, or even more niche markets like the Dutch economy in the case of the AEX?
News events can dramatically influence an underlying asset's price, so it's crucial to be aware of any scheduled announcements that could affect your chosen underlying. Furthermore, your strategy also plays a pivotal role in this choice. For instance, if you plan to hold multi-leg strategies until expiry, indices might be a better fit due to their European-style options, which settle in cash and eliminate the risk of early assignment.
On the flip side, if quick scalping is your goal, highly liquid ETFs with tight spreads could be more suitable. These ETFs often have bid-ask spreads of just one or two cents, making them ideal for rapid entry and exit.


The importance of liquidity in options trading, especially in the realm of 0DTE, cannot be overstated. The ease with which you can enter and exit positions is pivotal for the success of your trades. High liquidity minimizes slippage, which becomes increasingly important as you scale up the number of contracts in your trades.
While most 0DTE options are generally liquid, there are gradations. ETFs like SPY and QQQ stand at the pinnacle of liquidity, virtually eliminating liquidity concerns for retail investors. Major indices like SPX, NDX, AEX, and RUT follow closely behind, offering robust liquidity for most trading needs.
However, caution is advised when trading micro index options such as those on the S&P 500, Nasdaq-100, and AEX, as they may be less liquid. When in doubt, opt for 'round' strike prices ending in zero or five, as they often have higher open interest. To keep tabs on liquidity, consider customizing your option chain or strategies window to display volume and open interest metrics.

Implied Volatility

Implied Volatility is a critical factor in options pricing and can significantly influence the success of your 0DTE trades. It essentially reflects the market's expectation of how much the underlying asset will move. A higher IV means the option is more expensive, and thus, selling strategies may offer higher premiums.
However, IV is not static; it's influenced by a host of factors, including current news events. For instance, major announcements from institutions like the Federal Reserve about inflation or interest rates can send ripples through the market, spiking IV to higher levels.
Experienced traders can use these spikes to their advantage by deploying strategies that benefit from high IV, such as selling options to capture inflated premiums. Conversely, traders who are less comfortable navigating the choppy waters of heightened volatility might choose to sit out during these turbulent periods.
Understanding and strategically using IV can be a game-changer in your 0DTE trading journey.

Strike Selection

The strike price you choose will depend on your strategy. For example, out-of-the-money (OTM) options may be suitable for premium sellers, while in-the-money (ITM) options may be more appropriate for directional trades.
Selecting the appropriate strike for your 0DTE options is a nuanced decision influenced by various factors. One common method is to look at the Delta of the option. A Delta around 0.2, for example, may indicate a lower probability of the option expiring in-the-money, which could be suitable for premium-selling strategies.
Another approach focuses on the premium you wish to receive. You might have a specific range in mind, say between $1 and $1.2, and select the strike that allows you to collect this amount. This can be particularly useful when you have a targeted return on capital.
Volume and open interest are also crucial considerations. Options with higher volume and open interest are generally easier to trade due to better liquidity. This can be critical in fast-moving markets, where being able to quickly enter and exit positions is vital.
Sometimes it's a mix of these factors that guides your strike selection. Balancing Delta, desired premium, and liquidity considerations can help you pinpoint the strike that best aligns with your trading objectives and risk tolerance.

Time to Expiry

In 0DTE options, the timing of your market entry and exit can be pivotal. Unlike longer-dated options, the time decay (Theta) in these contracts is not a slow burn but a rapidly accelerating force, especially as the day nears its end.
When you choose to enter the market can be strategy-dependent. Some traders prefer to initiate positions at the start of the trading day to capitalize on full-day movements. Others might wait until around lunchtime (EST) when markets are generally calmer to establish their positions. There's also a cohort of traders who enter the market in the last few hours, aiming to take advantage of the accelerated time decay.
Your exit strategy should also be well thought out. While some traders aim to hold their positions until the options expire worthless at the end of the day, others may look to exit earlier to lock in gains or minimize losses.
It's important to note that the market can behave erratically in the last few minutes of the trading day. Many day traders unload their positions before the bell, which can result in sudden price movements. On bullish or uptrending days, this could mean a sudden drop in prices, and the opposite can occur on bearish or downtrending days.
Being mindful of these time-sensitive elements can significantly influence your 0DTE trading outcomes.

Contract Size

In the realm of 0DTE options, the contract size can significantly impact both your potential gains and losses. Contract size refers to the number of underlying assets represented by a single options contract. For most stock options and many index options, a standard contract represents 100 units of the underlying asset. However, this can vary depending on the specific option you're trading.
The NDX, or the Nasdaq-100 Index options, are a case in point. With a contract size of 100 times the index, the nominal value can be astronomical. At current levels, you're looking at a contract value of approximately $1.5 million. Even though NDX options are cash-settled and don't carry assignment risk, the financial implications of a trade gone wrong can be substantial.
Choosing the appropriate contract size also intersects with your overall risk management strategy. Are you comfortable risking a large nominal amount, or do you prefer to keep the stakes lower? The contract size can influence the collateral requirements, especially when selling options, and thereby affect your capital allocation and margin utilization.

Trading Hours

The availability of trading hours for 0DTE options can be a significant factor in your trading decisions. Different markets have different operating hours, and you need to align your trading activity with these schedules.
For example, if you're based in Europe and want to trade during your daytime, European markets like the AEX might be more suitable for you. On the other hand, if you're more comfortable with U.S. markets and their respective trading hours align better with your schedule, then options like SPX, SPY, or NDX could be more appealing.
Some traders have the flexibility to trade full-time, while others may be juggling trading with a day job. In the latter case, you might prefer markets that are open during your off-hours. If you're looking for even more flexibility, you could consider options on futures, which typically trade nearly 24/5, giving you almost round-the-clock access to the markets.
Your choice of trading hours can also impact the strategies you employ. Some traders prefer to execute trades during specific periods, such as the usually calmer mid-day hours in the U.S. markets, while others might aim to capitalize on the volatility that often accompanies market openings and closings.
In essence, your trading hours are another element to consider in your overall strategy, meshing with your lifestyle, risk tolerance, and trading objectives.

11. Trade checklist
Before diving into the fast-paced world of 0DTE options trading, it's crucial to have a systematic approach. This checklist is designed to be your pre-flight routine, helping you consider all the key aspects that could affect the outcome of your trade. From selecting the right underlying asset to ensuring you're psychologically prepared, each item on this checklist aims to guide you through your decision-making process. Think of it as your safety net, helping you avoid common pitfalls and trade with greater confidence.
  1. Real-Time Data Subscription: Do you have access to real-time data feeds for the relevant market?
  2. Underlying Asset: Have you selected the right underlying asset based on your strategy, knowledge, and current market conditions?
  3. Liquidity: Have you checked the liquidity of the options you're considering? Are there enough volume and open interest?
  4. Implied Volatility: Are you aware of the current implied volatility and any news events that could affect it?
  5. Strike Selection: Have you chosen your strike based on delta, premium, volume/open interest, or a combination thereof?
  6. Time to Expiry: Have you considered when you'll enter and exit the market, keeping in mind the accelerating theta decay and potential for erratic price behavior towards the end of the trading day?
  7. Contract Size: Are you aware of the nominal value of the contract you're considering? Have you considered how it aligns with your risk tolerance?
  8. Maximum Loss: Do you know your maximum loss for the trade, and can you live with it if it occurs?
  9. Trading Hours: Have you considered the trading hours of the underlying asset? Does it align with your availability and trading schedule?
  10. Stop-Loss: Do you have a stop-loss set? Are you using a physical stop-loss order or a mental one? If it's the latter, are you disciplined enough to act when the mental stop-loss is triggered?
  11. Take Profit Target: Do you have a take profit target defined?
  12. Number of Contracts: Do you know how many contracts you'll be trading based on your capital allocation and maximum acceptable loss?
  13. Contingency Plan: What will you do if things go wrong? Do you have strategies for adjustment, rolling, or closing certain legs?
  14. Profit Management: What will you do if the trade goes in your favor? Do you have a plan to manage your "greed" emotions to prevent a profitable trade from turning into a loss?
This checklist serves as a comprehensive starting point for your 0DTE options trading journey. Feel free to add or modify items based on your unique trading style and requirements. Making it a habit to go through this checklist before initiating a trade will better equip you to handle the unpredictable nature of the markets.

12. Time to get our feet wet. Some examples
The example section serves as the practical culmination of all the theoretical insights we've covered so far. Using real-world trade setups from September 5, 2023, that I could have executed—though I didn't, as my focus was on writing this article —we'll delve into how these theoretical concepts come to life. Each example is accompanied by a snapshot and brief commentary to elucidate the key considerations and decisions involved. Whether it's choosing the right strategy or managing risk, these examples offer a hands-on look at the intricacies of trading 0DTE options

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.


Put Butterfly on the SPX

Entry Timing: About 1.5 hours before market close.
Cost: $1.20 per contract.
Defined Risk: The maximum loss is known upfront—it's the debit paid to enter the trade.
Price Sensitivity: This strategy requires precise predictions. The SPX needed to end between 4506.20 and 4513.80. It ended at 4496.83, which would've resulted in a max loss.
Limited Adjustment Time: Given the close proximity to market close, there's little time to adjust if the market moves against you.
Take-Profit Strategy: A take-profit could be set at a credit of $2.00 to $2.40. This could've been beneficial as the SPX only dropped out of the break-even range in the last 15 minutes.
Stop-Loss Strategy: No stop-loss was set because the maximum loss was predefined.
Key Takeaways:
Risk Management: Make sure you're comfortable with the maximum loss before entering the trade.
Profit Management: Don't be too greedy; set reasonable take-profit levels.

Call credit vertical spread

The next example showcases a Call Vertical Spread, a high-probability strategy that brings in premium as soon as you open the trade. For this hypothetical trade, the credit received would have been $0.85, a decent return for a 90-minute investment. However, it's essential to note that the margin requirements are nearly as high as the maximum risk involved in the trade.
This scenario underscores the critical importance of using a stop-loss. Without one, the maximum loss potential could make your risk-to-reward ratio skew unfavorably, akin to trying to "catch a penny in front of a train." For this trade, a stop-loss would be set at three times the credit received on the short leg (the 4515 strike), amounting to $2.40. Interestingly, in this case, the market moved downward towards the end, meaning the stop-loss would not have been triggered, and the initial credit would have transformed into profit at the day's close.

Wide iron condor

The final example delves into an Iron Condor, a strategy ideally suited for the horizontally moving market observed on September 5th. The trade would have generated an opening credit of $1.65, with a margin requirement approximately ten times that amount. The potential maximum loss was again significant, making it crucial to implement stop-losses for risk mitigation.
However, the mechanics of an Iron Condor require not one but two stop-losses: one for the short call and another for the short put. A typical approach is to set each stop-loss (or a stop-limit with a range of $0.40) at three times the credit received for that respective leg. For instance, the stop-loss for the short call would be set at $2.40 (3 x $0.80), and for the short put at $3.15 (3 x $1.05).
A crucial aspect to consider is that while a loss in a standard Iron Condor setup can only occur on one side (either above the call or below the put), when using stop-losses, you run the risk of losses on both sides due to market whipsaws. Setting take-profit levels can also be a useful approach, especially to avoid the market volatility often observed in the final minutes before closing.
In this high-stakes, fast-paced world of 0DTE options trading, it's imperative to trade mechanically and keep the two fundamental emotional drivers—fear and greed—at bay.

13. Final thoughts
In conclusion, the journey through the complex and exhilarating world of 0DTE options trading has been both enlightening and instructive. Whether you're a seasoned trader or a curious novice, 0DTEs offer a unique platform for understanding the intricate mechanics of options trading. Even if you opt not to trade them, the educational value is immense. Think of it as a real-time lab where you can observe, in fast-forward mode, how factors like theta decay and implied volatility impact option pricing.
If you do decide to venture into this high-risk, high-reward landscape, this guide aims to provide you with the tools and strategies needed to navigate it successfully. From risk management to choosing the right options, the information presented here is designed to offer a comprehensive look into the factors that can make or break your 0DTE experience.
Thank you for embarking on this journey with me. Whether your interest in 0DTEs is purely academic or rooted in the desire for financial gains, I hope this guide serves you well. Happy trading!

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