Nowadays, everyone on social media seems to be talking about 0DTE Options. To most investors, options are an advanced trading strategy that requires risk and capital. According to investment bank JPMorgan, in 2023, the daily notional value of 0DTE options traded on the US stock market hit $1 trillion.
So what are 0DTE options? The 0DTE is an abbreviation for “0 Days to Expiry”. For those unaware, every option contract comes with an expiration date. Whether it is a call or a put option, every contract has an end date at which it has to be either exercised or expire worthless. The shorter the expiration date, the more volatile the option value will be.
As the name 0DTE suggests, these options will expire later that day. The option contract being bought or sold will expire at the end of the same session. Why would somebody want to trade 0DTE options? You guessed it. The added volatility can cause wild price swings in either direction. 0DTE options provide an excellent risk-to-reward outcome for those trading options like a casino.
You are correct if you think that 0DTE options seem riskier than long-dated options. But traders like trading options because they provide a way for major gains at a minimal cost.
So if you buy 0DTE options, the maximum risk is your premium for each contract. And if you sell 0DTE options, you collect a premium and can always buy your way out of it if the trade goes against you.
There will always be traders that argue that 0DTE options can be a profitable way to trade. Of course, they could be, but you should know that in terms of success rate, the odds are against long-term success.
Trading 0DTE options is another way the stock market has evolved. With access to brokerages on mobile phones, traders are always looking for immediate wins. As a result, it’s not enough that most options contracts expire within a week. Now we want to trade options that expire within the same session.
How Can You Trade 0DTE Options?
Perhaps we should start with some basics: what is an option? Options contracts are derivatives of the underlying stock. The owner of the option contract has the right but not the obligation to buy the stock at a given price by the expiration date.
Effectively, these bets are placed toward the stock’s price. These can be long-term bets or, in the case of 0DTE options, very short-term bets.
Why do people trade options? First, they can provide a way to trade stocks without having much capital. Trading a single-option contract is cheaper than buying 100 shares of the underlying stock.
Options are also a great way to hedge your portfolio. For example, if you own long-term stock positions, you can hedge with options to capture any downside risk for your holdings.
As with any options, you can buy or sell 0DTE options. Now, remember, a majority of options have weekly expires. This means that most contracts will expire on a Friday. Does this mean to trade 0DTE options, you have to do so on a Friday?
Nope! You can trade 0DTE options on a Friday, but most traders use assets with daily options contracts. Specifically, the most popular assets are the Invesco QQQ Nasdaq ETF and the SPDR S&P 500 ETF, which trades under the SPY ticker.
There are a few other ETFs and assets that you can trade daily. However, most stocks will only have weekly expiry dates for options.
Do You Buy or Sell Zero Day Options?
You can do either or both! When you buy 0DTE options, you hope to capture the immense upside of the option contract, increasing in value. How does this happen? The price of the underlying asset moves in the direction of your call or put.
If your bet loses, you will lose the premium you paid. But if your bet wins, you can bring in some pretty hefty gains.
But when you sell 0DTE options, you make a more calculated bet. First, you earn that premium that the buyer pays whenever you sell an option. It doesn’t matter if it is a call or a put. That premium is yours.
When you sell a call, you are betting that the price of the asset will not rise above your strike price. If you are selling a put, you are betting that the price will not drop below your strike price.
The danger of selling options is that you will be assigned the shares you are trading. Remember, each option contract is worth 100 shares of the underlying stock or ETF. You should always make sure you have the capital or margin available to sell options in your account. You never know when you are going to get assigned!
While buying 0DTE options can be a bit of a gamble, selling them is an excellent strategy for earning income in your account. If you are good at reading the markets or charts, you can make a pretty tidy income just by selling 0DTE options.
When your bet is right, then the option will expire worthless and you will get to keep the premium. If you are assigned, you can use systems like the Wheel Strategy to continue to earn premiums on the new shares that you own.
Are Zero Day Options Considered Day Trading?
So if you know about the FINRA regulations of being a day trader, you should know that trading 0DTE options can fall under that bucket. There are ways around being labeled as a Pattern Day Trader, though. You should be fine if you have more than $25,000 in your account. A day trader makes four or more trades in five days.
If you have a smaller account and do not meet that $25,000 threshold, then maybe trading 0DTE options is not for you. A lot can go wrong in a short amount of time when you trade such short-dated options. If you will trade them, ensure you know how to close out an option trade before starting.
Can Trading 0DTE Options be Profitable?
Sure! Any trading strategy can be profitable. The key to something like trading options is to be consistent. Greed is the enemy of the trader. Always set your goal, and move on to the next trade once you hit it.
When you trade 0DTE options, you will always want to know what the market is doing. You don’t want to buy or sell this and then log out for the day.
Until you close your trade, it can go against you. As with any trading strategy, try it and hone your skills in a practice account. This will save you much of your hard-earned money once you start trading on the real markets.
Is 0DTE Option Premium Worth it?
This is another thing you will need to take into account. Are the premiums on a 0DTE option even worth the risk? Risk is always a personal thing. Your level is going to be different from everyone else’s. When we talk about premiums, we are usually referring to selling options. Does selling a 0DTE put or call provide you with enough premium?
It would be best if you also considered things like brokerage fees for trading options. Some brokerages have free trading, while others will charge you per contract. Finally, what is your trading or investing goals? Do you want to make this your career, or do you want to supplement your income? If you are considering trading 0DTE options, you are likely a serious trader.
If true, you might not find some of the premiums worth it after paying your brokerage fees. Once you start trading multiple options contracts, you need a larger account balance or margin to be used as collateral for your trades. Before you start, you will want to ensure that trading 0DTE options is worth it over trading weekly or monthly options.
The Bottom Line
In 2021 we had meme stocks and YOLO trades. In 2023, we now have 0DTE options as the weapon of choice for day traders. As we mentioned, 0DTE options are risky and volatile. You strongly know how volatility and options pricing work is a good start to trading them. Trading 0DTE options is not for the faint of heart. The premiums are lower than longer-term options, and you must be at your computer or mobile phone monitoring the trade until you close it out. Trading 0DTE options is a commitment; unless you can provide full attention to the markets, things can go sideways quickly.