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On-screen text: Disclosure: Some ETFs trade to 4:15pm ET.
Narrator: Zero-days-to-expiration options are contracts that expire at the end of the current trading day rather than days or weeks in the future. Known as 0DTE options, they offer options traders a chance to make a quick profit off a small price change in an underlying security, but can also quickly lead to substantial losses.
Remember that the information here is strictly for educational purposes only. It shouldn't be considered, individualized advice or a recommendation. Also, options trading involves unique risks and is not suitable for all investors. 0DTE options can magnify some of those risks, but we'll talk more about that in a minute.
Daily 0DTE options started trading in 2022 and, by November of 2023, they accounted for half of all the S&P 500® index (SPX) options volume. If you're not familiar with options, check out our basic options videos.
On-screen text: Options buyer benefits.
Narrator: These options may have a unique draw for more sophisticated options buyers because they can provide traders with an opportunity to quickly capitalize on the volatility of an index or ETF in a short amount of time.
They also tend to have lower premiums compared to longer-dated options, which can make them a less expensive vehicle when trying to take advantage of a short-term volatility opportunity.
On-screen text: Option seller benefits.
Animation: A timeline of the trading day shows the symbol for theta growing throughout the day as the hours to expiration diminishes ahead of the close.
Narrator: Option sellers may be drawn to the fast time decay and the potential for quick returns. There's a lot to consider before you start trading 0DTE options, like the fact that leverage is a two-edged sword that can cut both buyers and sellers.
If you think about it, every options contract on an underlying optionable index, stock, or ETF becomes a 0DTE contract on its expiration date. In the past, there were only expirations once a month or once a week, but now there are options that expire every day.
So, while the concept isn't new, it's important to remember that the short-term nature of the options means they can experience significant price swings right before they expire.
As of 2023, these contracts are available on major stock indexes and some index ETFs. One important difference between index options and equity options is how they settle. Index options settle in cash, whereas equity options, like those used for ETFs, settle in shares of the security.
So, why would a trader consider an option with the average lifespan of a mayfly? There are a few reasons.
First, they can provide the potential of big profits for long option traders. Imagine the SPX was trading at 4,955 and a trader bought a 4,955 at-the-money call option for $11.50. The index rallied 1% to 5,004. At the end of the day, the call option might be worth $49 for a profit about $38, not including commissions or fees. That's more than a 300% profit off a 1% move in the index.
Animation: The original premium or debit is $11.50, or $1,150 with the multiplier. The premium grows to $49, or $4,900. A profit of $37.50, or $3,750, is the result.
Narrator: But remember, options cut the other way too. If the price of the index fell or even stayed the same, the trader could lose their entire investment.
Second, they offer quick time decay for option sellers. Once again, imagine the SPX was trading at 4,955 and a trader sold a 4,935 put for $5.90. If the index were to rise, go sideways, or even come down to 4,936, the trader could keep the entire credit. However, if the index fell below 4,935, the trader would begin to incur losses. While initially, the losses might only erase the gains from the sale of the put, the losses could grow quickly. Unlike the first example, a trader could lose substantially more than their initial credit.
Animation. A graph shows the underlying price falling. The premium grows to $34.90, or $3,490. The difference in the credit and the current premium results in a loss.
Narrator: If the index fell 1% to 4,906, the trader would lose $2,900, not accounting for commissions or fees. Additionally, the margin requirement for selling index options can be substantial and traders are required to maintain sufficient account equity for the short position.
Third, 0DTE options are potentially less expensive compared to options with more days to expiration because they have less time value. This means that time decay will work faster. For this reason, it's especially important to make sure that if you trade 0DTE options, you do so consistent with your risk appetite.
Fourth, 0DTE options that expire don't count against the pattern day trading rule. Opening and closing a 0DTE option on the same day before expiration does count, however. To learn more about the pattern day trading rule, check out some of our other education on the subject.
Finally, due to the high volume, the bid/ask spread tends to be tight. Tight spreads can help lower trading costs.
There's risk to these trades, though, which work mostly like regular options but on a truncated timetable. The options greeks are an important tool to understanding how 0DTE trades work because they can provide insight to how to manage the inherent risk.
The greeks are theoretical measurements of how a contract is influenced by changes in price, time, and volatility. The greeks for 0DTE are the same as longer-dated options—long calls have positive delta and gamma, negative theta, and positive vega. But what you must be prepared for is that many of the values are much higher than with longer-dated options and some change quite a bit throughout the day. That means that a trade can turn positive or negative very quickly.
On-screen text: Disclosure: Some ETFs trade to 4:15pm ET.
Animation: A timeline of the trading day shows the symbol for theta rising throughout the day as the hours to expiration diminishes ahead of the close.
Narrator: One important factor is time decay, which is measured by theta, theta the rate at which extrinsic value melts. When the option gets closer to expiration, it melts faster. Because 0DTE options are so close to expiration, time decay will occur at higher speed than longer options. And that speed can increase throughout the day, diminishing the chances that a long trade will succeed if it hasn't already happened.
If a long call trader doesn't get the immediate move to the upside they were hoping for, they may consider closing quickly to avoid potentially losing all the invested capital when the contract expires.
At the same time, 0DTE options become more highly attuned to the price of the underlying as the day goes on. That's because of an increase in gamma, which tracks changes in the delta of an option.
Animation: A long call has a premium of $181, a Delta of .56, and a Gamma of .10. The gamma reduces the delta to .46 and the premium falls to $75.58.
Narrator: So, in a single trading session, even a minor change in the price of the underlying asset of a 0DTE option can greatly affect the delta which in turn changes the value of the option before it expires.
Short option traders should consider gamma risk because late market rallies or selloffs could turn a positive trade to negative, very quickly. Gamma risk can also hurt long option traders because a change in direction could reduce profit and compound losses.
Zero-days-to-expiration options are a popular but risky trading vehicle that are best suited for experienced option traders with a high tolerance for risk. Consider practicing trading 0DTE options using the thinkorswim® paperMoney® platform before committing real money to your strategies. Also, consider developing a trading plan that defines when to enter and exit trades, as well as how much you're willing to risk on each trade.
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