What Are Zero Days to Expiration (0DTE) Options
Options with zero days till expiry, or 0DTE options for short, are option contracts that expire on the same day they are traded. When an option reaches this point in its life cycle, there is little time remaining to exercise the right to purchase or sell the underlying asset.
In recent years, 0DTE options trading has become a more prominent popular approach for premium collection and traders trying to take advantage of short term volatility. However, remember that opening close to expiry options comes with greater risks and is not suitable for all.
How Do Options With Zero Days to Expiration (0DTE) Operate?
An option is a contract that gives the buyer the right, but not the obligation, to purchase or sell an underlying asset at a given price within a defined time frame. This right does not include the obligation to do so. Every options contract has an expiration date in its terms. If an investor has decided not to exercise the option or close the position, it will expire either in the money (ITM) or out of the money. If an option expires ITM, then the option is typically automatically exercised, which can lead to the purchase or sale of the underlying asset at the strike price.
Options with 0 days left before expiration indicate today's (same day) expiry date. The number 0 in front of DTE signifies that this is the final day the option may be used. While dealing with options, a trader often has a more ample amount of time to wait and watch to see whether the underlying asset moves in the direction that's favorable to the option trader. Nevertheless, this is different with 0DTEs. At this late hour, time is of the utmost importance.
Some option traders consider the final day before an option's expiration date an opportune time to invest in options. Traders may utilize 0DTE options because it may allow them to potentially capitalize on short term volatility while only locking up cash for brief periods. Keep in mind that opening new options positions close to or on their expiration date comes with substantial risk of losses for reasons that include potential volatility of the underlying security and limited time to expiration.
Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation.
What May Be Reasons Why Zero Days to Expiration Options Are So Often Utilized?
0DTE options can offer the potential for quick returns, but they also come with significant risks. Some features that make 0DTE strategy potentially useful to some traders include:
No overnight risk: Eliminates the risk of carrying positions overnight assuming there is no exercise or assignment of the option contract
Lower premiums: Can be relatively lower than premiums for longer-dated options
Tight spreads: The 0DTE market tends to have little difference between the bid and ask price of each option assuming adequate liqudity.
0DTE Options and Theta Decay
Depending on how far away the date to expiration (DTE) is, the theta decay of an options contract may be negligible, while there are still weeks or months to go before it expires.
When a trader opens a position by purchasing 0DTE options, the trader's position will have a high percentage of theta decay, which means that time is operating against the trader's position. If the underlying asset does not considerably shift in the direction of the trader's favor before the position expires, the trader's position may expire out of the money, which means it will be worthless.
For option sellers, with all other factors constant, theta decaying is now operating to the trader's benefit if a trader sells 0DTE options to initiate a position, such as a credit spread. If a trader finds themselves in one of these situations, time should work in their favor, and the likelihood of making a profit is increased — so long as the transaction does not shift against them.
Are Options with Zero Days to Expiration (0DTE) Profitable to Trade?
Selling and purchasing options with 0 days till expiry might result in profits or losses. At this late point, there is a lot at risk and there could be significant short term volatility in just one day.
There are a variety of differing opinions on this sort of investing plan. Because of the many accounts of in
dividuals losing money, 0DTE choices have been compared to playing the lottery. When you purchase an option on the final trading day before it expires, there is much pressure for your expected outcome to occur in a very short time period. Experienced investors with a high level of confidence may use 0DTE options, and these trades should consider trying to hedge accordingly just in case things do not go as planned.
0DTE Options Trading Strategies
Zero day options can be tied to the price of stocks, exchange-traded funds (ETFs), or indexes. 0DTE trading strategies can involve establishing a position on an options contract that expires at the end of the current trading day. Investors and traders trading 0DTE options need to be aware and understand the increased risks with these positions and determine if this options type is a good match for their risk profile, investment goals, and objectives.
Single Option Strategies
With a single option strategy, this means that an investor can buy a single option (a long call or a long put), or sell a single option (a short call or a short put). When choosing a symbol for this trade type, a trader might consider those with high daily volume and frequent expiration cycles.
Covered Calls
Traders owning the underlying stock may choose to sell weekly or zero DTE call options against their stock positions. The covered call strategy allows them to potentially earn income from the premiums collected by selling the calls. However, it is important to note that this approach can cap the potential gains from the stock if its price experiences a significant increase and the writer is assigned at expiration and must sell the stock at the strike price.
Vertical Spreads
This encompasses strategies including bull and bear call spreads as well as bull and bear put spreads. Vertical spreads can also provide an opportunity for traders to effectively manage their risk but still aim to take advantage of anticipated bullish or bearish movements in the underlying asset.
Cash-Secured Puts
Options traders may choose to sell 0DTE put options by keeping enough cash aside to buy the underlying stock if the short put(s) is assigned. Similar to a covered call, the cash-secured put strategy can potentially generate income from the option premium received. This strategy can potentially allow the trader to buy the underlying stock at what they consider to be at a discounted price. Keep in mind, if the stock price rises, you may miss out on the opportunity to buy the stock at a lower price.
Iron Condors
Iron condors are a trading strategy that can be employed using 0DTE options. They involve simultaneously selling options above and below the current price (or out of the money), with a short vertical put spread and a short vertical call spread in the same expiration and on the same underlying asset. This neutral strategy can potentially profit from the underlying trading in a range through the expiration of the options contract. The theoretical maximum loss is capped at the width of the widest spread, less the credit received up front.
Straddles and Strangles
0DTE long straddles and strangles can be used when traders, in the very near term, expect a substantial move higher or lower in the underlying asset, but are uncertain about the direction. These strategies are considered debit trades since traders pay a premium to open the position; they can benefit from gap moves in the underlying. With 0DTEs, if a trader believes the underlying may move sideways (price of a stock, commodity, or security fluctuates within a narrow range for a period of time without trending in one direction or the other), they could trade a short strangle/ straddle or if they expect a large move in the underlying to one direction, they could trade a long straddle/strangle. It's important to be aware of the risks of short straddles and strangles, especially if it involves a naked call. Potential loss is unlimited if the stock price rises and substantial if the stock price falls.
How to Find Top 0DTE Options on Moomoo
Steps: Markets> Options> Top Options Expiring This Week> Tap the Call or Put to enter the detailed quotes page> Select filters to find options you want.
Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation.
How to Trade 0DTE Options on moomoo
For traders and experienced investors interested in trading 0DTE options, they can typically follow the same steps as if they were trading monthly options. Here's some steps for 0DTE options trades.
Open a brokerage account: Open one that allows 0DTE trading, such as an options-approved account with margin as well as one that has tools and features for trading them. Fund the account after selecting one.
Conduct research: Review analysis such as technical analysis and fundamental analysis to identify possible short-term price movements.
Select options: Pick an underlying asset and options that can meet an investor's investment goals and risk profile as well as select a position that also meets these.
Place an order: Use the brokerage account to place a 0DTE options order based on a strategy. Order types can vary from a limit order, market order, or stop order.
Monitor the position: Keep an eye on the order to track price changes and be prepared to adjust the position or exit the trade if needed.
Conduct the exit strategy: Be prepared to execute the exit strategy to either lock in profits or minimize losses from the position.
Advantages and Risks of 0DTE Options
Potential Advantages
Lower premiums: Can be less expensive than options with longer expiration dates (DTEs). Premiums for 0DTEs can be in cents, while DTEs can be in dollars.
Tight spreads: Bid-ask spread for 0DTE options is usually very tight, which can help limit trading costs.
Flexibility: Some underlying assets are available every trading day, which can give traders more flexibility in their strategies. For example, traders can potentially take advantage of short-term price movements, react to news events, and adjust their positions based on market conditions.
Time efficiency: Can allow for quick decision-making and potentially rapid returns. This can be especially advantageous for premium sellers who can capitalize on fast theta decay.
Potential Risks
Intraday volatility: Can be risky due to the potential for large price swings within a single day. For example, an unexpected event, like a Federal Reserve announcement, could trigger these swings and potentially have a negative impact if traders aren't hedged properly.
Limited time to expiration: With little time remaining to exercise the right to purchase or sell the underlying asset, traders may be unable to possibly profit if the security doesn't move significantly before the option expires.
Pattern day trading: There's an increased chance of being flagged as a pattern day trader, which could limit accounts with less than $25,000 in equity. “Day trade” is the purchase and sale, or the sale and purchase, of the same security on the same day in a margin account.
Being assigned: Sellers may be assigned if a buyer chooses to exercise the option before the market closes.
FAQs about Zero Days to Expiration (0DTE) Options
What exactly does DTE mean in options?
DTE is an abbreviation for "days to expiry," which informs us how many more days we can purchase or sell an underlying asset at a predetermined price. After the allotted time, the options expires either in the money or out of the money.
When do 0DTE options expire?
A 0DTE indicates that the option will expire on the same day it was purchased.
What are the consequences of the option not being exercised before it expires?
Option purchasers are not obligated to exercise the contract if it expires out of the money. The option is said to have expired and is no longer available if the deadline for taking action has passed. In this scenario, the buyer would be left with nothing and would be out whatever money was given to the writer (the premium) for the opportunity provided to them. If a put option expires in the money, it means that the strike price is higher than that of the underlying security, the holder of the contract will lose money. Oppositely, when a call option expires in the money, its strike price is lower than the price for the underlying security, the holder of the contract will get potential profits.
0DTE vs. DTE Options: What are the differences?
0DTE stands for zero days to expiration, and refers to options that expire on a single trading day. DTE stands for the number of days to expiration, and refers to options that expire in more than one trading day including weekly, monthly, quarterly, or even multiple times a week, depending on the underlying asset.
Additional differences include:
Cost: 0DTE options can be less expensive than DTE options, with premiums sometimes in cents instead of dollars.
Time: With 0DTE options, the expiration date is imminent, so time is of the essence. Traders usually have more time to wait and see if the underlying asset moves in the direction they've speculated on with DTE options.
Market spread: The 0DTE market tends to have a tight spread, with little difference between the bid and ask price of each option.
Does 0DTE options trading increase volatility?
Yes, zero-day-to-expiration (0DTE) options trading can influence market volatility. As these options approach their expiration, traders often engage in rapid buying and selling to capitalize on the price movements of the underlying assets. This heightened activity can lead to short-term spikes in volatility as traders react to market news, earnings reports, or macroeconomic indicators. Furthermore, the allure of potentially high returns from these options can encourage speculative trading, which can amplify price swings and increase risks.
Which stocks have 0DTE options?
Technically, any optionable stock can have 0DTE options available at least once a month. However, some securities offer options that expire every day, and these are the most commonly-traded 0DTE options. For example, the Chicago Board of Options Exchange (CBOE) offers expiring contracts on every trading day for these securities: Nasdaq 100 Index (NDX) and the S&P 500 Index (SPX).