Trading 0DTE's: getting your feet wet, without drowning - part 1

Trading 0DTE's: getting your feet wet, without drowning - part 1

Options 10 minutes to read

Koen Hoorelbeke

Options Strategist

Summary: In the ever-evolving landscape of options trading, few strategies have garnered as much attention -and debate- as Zero Days to Expiration -0DTE- options. In this in-depth guide, we aim to demystify the hype surrounding 0DTE options and provide a balanced, educational perspective. The goal of this guide is simple - to equip you with the knowledge and tools you need to decide if 0DTE options trading is a road you're willing to travel. 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.

Discover 0DTE Options

Trading 0DTE's: getting your feet wet, without drowning - part 1

1. Introduction

In the ever-evolving landscape of options trading, few strategies have garnered as much attention—and debate—as Zero Days to Expiration (0DTE) options. They're the talk of the trading forums, the subject of countless YouTube tutorials, and the whispers among traders looking for the next big thing. While some hail 0DTE options as the fast lane to quick profits, others caution that they're a surefire way to crash and burn your portfolio. So, what's the real story?

Welcome to this in-depth guide, where we aim to demystify the hype surrounding 0DTE options and provide a balanced, educational perspective. Think of it like taking your first drive on a highway. It's an intimidating experience, fraught with risks like high speeds and unpredictable drivers. But it's also liberating, offering you the freedom to go farther, faster. Just like highway driving, navigating the world of 0DTE options comes with its own set of merits and challenges.

The goal of this guide is simple: to equip you with the knowledge and tools you need to decide if 0DTE options trading is a road you're willing to travel. 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.

In this first part of our "0DTE trading - getting our feet wet" guide we will cover the following sections:

1. Introduction

2. What are 0DTE's?

3. A little history about 0DTE's

4. Why 0DTE's?

5. Do we have 0DTE's at Saxo?

6. For who?

7. Fancy trying? Beware!

8. Which are the most common strategies

In the second part we will cover the following topics:

9. Risk management

10. Choosing the right options

11. Checklist

12. Time to get our feet wet. Some examples

13. Final Thoughts

2. What are 0DTE's?

Zero Days to Expiration, or 0DTE options, may sound exotic or 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.

3. A little history about 0DTE's

The practice of options trading has been around for centuries, but the specific phenomenon of 0DTE options is a relatively recent development. When the Chicago Board Options Exchange (CBOE) was founded in 1973, it initially offered only quarterly options. In a way, you could argue that the concept of daily options has been around since then, but limited to just four days a year—the quarterly expirations.

Over time, as the market matured and the demand for more frequent trading opportunities grew, monthly and then weekly options were introduced. The Amsterdam Exchange (AEX) took a significant step by launching daily options on March 31, 2008.

Fast forward to 2016, the CBOE began offering weekly expirations on Wednesdays, aligning with VIX options expirations. Later that same year, the CBOE introduced Monday expirations to address weekend risk. However, it wasn't until 2022 that 0DTE options truly took off, with the introduction of SPX options for each trading day of the week.

This rapid growth in the variety of 0DTE options has been fueled by advancements in trading technology, increased market volatility, and a new generation of traders seeking opportunities in shorter time frames. The rise of 0DTE options is a testament to both market demand and technological innovation, showing how financial markets continuously evolve to offer both opportunities and challenges.

4. Why 0DTE's?

0DTE options have become a point of interest for a specific segment of traders and investors, and for compelling reasons. In this section, we'll focus solely on the advantages that make these options particularly appealing. We will explore the considerations and risks associated with 0DTE options in a later part of this guide.

Advantages

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. Have a look at the screenshot below. In this example you clearly see that the price of an at the money SPX 4515 call with a 1 day expiration is a lot cheaper than that same call with an expiration of 11 days. So if you're a daytrader and you want to buy this option, it's clearly more cost-efficient to buy the option with the closer (same day) expiration.

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.

5. Do we have 0DTE's at Saxo?

The answer is a (of course) yes. Saxo Bank offers a selection of 0DTE options across various asset classes and indices, catering to both investors and traders with diverse needs and risk profiles..

Our 0DTE/daily options:

Ticker	Name	Contract Size (times index/etf)
SPXW:xcbf NDXP:xcbf XPS:xcbf XND:xcbf RUTW:xcbf QQQ:xcbf SPY:xcbf IWM:xcbf AEX:xams MOA:xams ES:xcme MES:xcme NQ:xcme MNQ:xcme	S&P 500 Index Weekly options NASDAQ 100 Index Weekly Options S&P 500 Mini Index options Nasdaq-100 Micro Index Options Russell 2000 Index Weekly Options Invesco QQQ ETF Weekly Options SPDR S&P 500 ETF Weekly Options iShares Russell 2000 ETF Weekly Options AEX Index Options Micro AEX Index Options E-Mini S&P 500 Futures Options Micro E-Mini S&P 500 Futures Options E-Mini NASDAQ-100 Futures Options Micro E-Mini NASDAQ-100 Futures Options	100 100 10 10 100 100 100 100 100 10 50 5 20 2

*Coming Soon: EuroStoxx 50 Day Options.

Note: We currently offer Weekly Options on EuroStoxx with the ticker OESXW:xeur.*

Special note on AEX options and instrument search

For those interested in trading AEX Index Options, it's important to understand the unique ticker naming convention. Weekly expirations are denoted by the ticker AXx:xams, where the small 'x' is replaced by the week number. These are the options that expire on Fridays.

For non-Friday expirations, the ticker uses the format Axx:xams, where 'xx' is replaced by the day number of the month. For example, A01:xams corresponds to the day options for the first of the month, provided that day is a trading day and not a Friday.

To easily find these options, simply type "AEX" in the "Instrument Search" box and click on the little arrow, as shown in the accompanying screenshot. This trick also works for finding weekly options on high-volume stocks like Apple, Microsoft and many other stocks.

6. For who?

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. We will discuss the considerations and risks associated with 0DTE options in a later section to provide a balanced view.

7. Fancy trying? Beware!

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. Below are some key points 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.

Before you jump into the world of 0DTE options, it's imperative to have a well-defined strategy and risk management plan. This is not a realm for the inexperienced or the risk-averse.

8. Which are the most common strategies?

0DTE options, while similar to their longer-dated counterparts, possess distinct features that influence strategy selection. Their short lifespan and high leverage make them more sensitive to market movements, requiring specific strategies that account for these variables.

Buying and selling long options

Among day traders, buying and then selling long options has gained popularity, particularly for highly liquid ETFs like the SPY and QQQ where bid-ask spreads are minimal and volume is high. This liquidity opens the door to advanced techniques such as scalping, high-frequency trading, momentum trading, and others. However, this approach is not without risk. The rapid theta decay means you have to be quite accurate in your directional assumption, making this strategy not for the faint of heart.

Defined risk strategies

Defined risk strategies like iron condors or vertical spreads are often preferred for their limited loss potential, providing a safety net in volatile markets.

Selling premium

0DTE options are highly attractive for premium sellers due to their accelerated time decay. Undefined risk strategies like selling naked puts and/or calls and selling strangles are among the options here. However, these strategies are capital-intensive due to high margin requirements and are only advisable for experienced traders, as profits can quickly turn into devastating losses. Defined risk strategies such as iron condors or vertical spreads are also viable for selling premium, offering a more conservative approach. Selection should focus on high-probability setups to mitigate risk.

Delta neutral strategies

Delta-neutral positions can be beneficial for traders looking to profit from volatility rather than directional moves. Strategies like straddles (undefined!) or iron flies (defined) are well-suited for this.

Spreads and butterflies

Using spreads and butterflies can effectively reduce capital outlay while maintaining a reasonable probability of profit.

The choice of strategy should align with your market outlook, risk tolerance, and trading objectives. The unique characteristics of 0DTE options demand a nuanced approach in strategy selection.

In this first part of our "Trading 0DTE's - getting your feet wet, without drowning", we've laid some of the important groundwork for understanding zero days to expiration options, for both new and experienced traders. In the next part of this guide we will delve deeper into aspects as risk management, choosing the right options for the job, a checklist and then some examples, to really get our feet wet.

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

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Trading 0DTE's: getting your feet wet, without drowning - part 1

Koen Hoorelbeke

Trading 0DTE's: getting your feet wet, without drowning - part 1

1. Introduction

2. What are 0DTE's?

3. A little history about 0DTE's

4. Why 0DTE's?

5. Do we have 0DTE's at Saxo?

Special note on AEX options and instrument search

6. For who?

7. Fancy trying? Beware!

8. Which are the most common strategies?

Related articles:

Latest Market Insights

Quarterly Outlook 2024 Q2

01 / 05

Macro: It’s all about elections and keeping status quo

FX: The rate cut race shifts into high gear

Equities: The AI and obesity rally is defying gravity

Fixed income: Keep calm, seize the moment

Commodities: Is the correction over?

Macro: It’s all about elections and keeping status quo

FX: The rate cut race shifts into high gear

Equities: The AI and obesity rally is defying gravity

Fixed income: Keep calm, seize the moment

Commodities: Is the correction over?

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Trading 0DTE's: getting your feet wet, without drowning - part 1

Koen Hoorelbeke

Trading 0DTE's: getting your feet wet, without drowning - part 1

1. Introduction

2. What are 0DTE's?

3. A little history about 0DTE's

4. Why 0DTE's?

5. Do we have 0DTE's at Saxo?

Special note on AEX options and instrument search

6. For who?

7. Fancy trying? Beware!

8. Which are the most common strategies?

Related articles:

Share

Latest Market Insights

Quarterly Outlook 2024 Q2

01 / 05

Macro: It’s all about elections and keeping status quo

FX: The rate cut race shifts into high gear

Equities: The AI and obesity rally is defying gravity

Fixed income: Keep calm, seize the moment

Commodities: Is the correction over?

Macro: It’s all about elections and keeping status quo

FX: The rate cut race shifts into high gear

Equities: The AI and obesity rally is defying gravity

Fixed income: Keep calm, seize the moment

Commodities: Is the correction over?

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