Fortune Favors the Risk-Takers - Trading 0DTE Options

Hey there! My name is Nate and I write about trading for the WOLF Financial newsletter. If you are looking for more trading tips and tricks, I guarantee you’ll enjoy my content on 𝕏, @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

Considering trading options with zero days to expiration?

Yes, I am talking about 0DTE contracts.

They have exploded onto the scene and at the same time exploded traders’ accounts, both in good and bad ways.

It is important to understand the risk and potential rewards that come with any trading strategy and with the rise of 0DTE trading, it is worth taking a closer look at trading these contracts.

Managing 0DTE Risk

To manage risk, you have to understand it.

Options that expire on the same day that you are trading them carry higher risk because of the short amount of time between when you enter a trade and when the contract expires.

Regardless of which side of the trade you are on, there is increased risk because of the contract expiration.

If the underlying ticker makes a sudden move it can have a big impact.

Intraday Volatility and Uncertainty

As expiration approaches, options near the money are extremely sensitive to movements in the underlying index, making them highly susceptible to intraday volatility.

This uncertainty can lead to options contracts swinging in and out of the money several times within a trading day, posing a significant risk.

It is important to utilize stop losses and have a really solid understanding of your risk relative to potential reward.

For 0DTE options trading, the tradeoff is often a potential loss all of the money you put in the trade.

This might sound crazy, but the other side of that risk profile is the potential for profits of 200-300% and in some cases more. Sometimes a lot more.

Potential for Quick Losses

Any strategy that can quickly earn profits can also bring about losses just as fast.

This is particularly true for 0DTE options, which are very sensitive to changes in the price of the underlying asset.

Consider a quick example.

If you buy a SPY call that is near or at-the-money for $1.00 per contract, and the shares drop by 0.25% those contracts quickly lose value.

A 0.25% drop for SPY at these levels is a move down of about 1.25 points and for these high-risk options contracts, that could wipe out nearly all of the value.

This is especially true later in the day when there is less time for recovery.

Benefits of 0DTE Options

If you day trade and use a strategy that benefits from quick and sometimes large moves, you might find 0DTE options attractive.

While they get a lot of negative press, there are reasons why these contracts are growing in popularity.

Outcomes Known Quickly

0DTE options obviously allow traders to take very short-term positions as well as hedges on the market, with the outcome of the trade known the same day.

Instead of adjusting your trading throughout the week to account for the number of days until expiration of the contracts you are trading, you can find a consistency with 0DTE options.

They always expire at the end of the day, and you can consistently trade this without needing to adapt for duration.

Lower Capital Requirement

These options tend to require less capital than equivalent strikes with further dated expiries, making them accessible and highly liquid.

A benefit of this is the very tight bid-ask spreads.

This means the difference between what you buy and sell the same option for is minimal, which is a benefit for any trader.

And the potential for lower premiums makes them less expensive for trading short-term volatility.

Flexibility in Trading Strategy

With 0DTE options available every trading day, you have more flexibility with your trading strategies.

You can take advantage of short-term price movements, react quickly to news events, and adjust positions based on market conditions.

While 0DTE options come with added risk, they also offer unique opportunities for traders to capitalize on short-term market movements.

The risk is real, and you should understand it thoroughly before attempting to trade these types of options heavily.

The lower capital requirements and high liquidity do make 0DTE options appealing. There is no denying it.

They also come with significant risks related to intraday volatility, limited decision-making time, and potential for quick losses so being prepared and having a plan is critical.

If you are considering 0DTE options you should have a detailed risk management plan, a clearly defined exit strategy, and a disciplined approach to trading.

And like I always say, regardless of the contract you decide to trade, remember to trade the charts in front of you.

Have a great week ahead!

-Nate

 @tradernatehere