How to Trade 0DTE Options: Beginner's Guide

What are 0DTE (Zero Days to Expiration) options?

Options with zero days until expiration only exist for a single trading session and are commonly referred to as zero days-to-expiration (DTE) options, or simply "0DTE.”

A 0DTE option could be a longer-term option that has reached the last day of its lifecycle (such as a monthly, weekly, or LEAPS option), or it could be a specific option that’s listed only for a single trading day.

Recent estimates suggest that approximately 46% of the total trading volume in the equities options market now consists of contracts with less than 5 days until expiration (aka 5DTE). That estimate is based on data compiled by the CBOE Options Exchange.

0DTE Options Trading Strategies

The only difference between 0DTE options and regular weekly or monthly options is the reduced time until expiration. Theoretically, that means the full spectrum of options trading strategies may be applied to zero-day options. 

However, because these options have very short lifespans, traders often employ strategies that capitalize on rapid price movements and/or short-term market fluctuations. In that regard, some of the same strategies utilized for trading weekly options are also popular with 0DTE options. 

These approaches are generally intended to profit from short-term and high-magnitude moves in the associated underlying. Or, on the opposite end of the spectrum, from the sudden collapse in the option’s premium, due to expiration. Some of the options strategies that match these outcomes are highlighted below:

  • Naked Options: This approach involves either buying or selling (writing) options without owning the underlying security. By purchasing 0DTE options, traders are generally hoping for a gap move in the underlying that triggers sharp appreciation in the value of the associated option. On the other hand, traders may elect to sell naked calls or naked puts with the expectation that the options will expire worthless, allowing them to keep the premium received. It should be noted that selling naked options carries significant risk, and can result in outsized capital losses. Learn more about naked options and how to trade them.

  • Covered Calls: Investors who own the underlying stock may also elect to sell weekly or 0DTE call options against their stock holdings. This approach can generate income from the premium received from selling the calls, but it can also limit the potential upside in the stock holding if the stock price rises significantly. Learn more about covered calls and how to trade them.

  • Cash-Secured Puts: Similar to covered calls, some options market participants opt to sell weekly or 0DTE put options by setting aside enough cash to purchase the underlying stock if the short put(s) get assigned. Like a covered call, this strategy can generate income from the option premium received. But it may also allow the investor/trader to purchase the underlying stock at a discounted price. This is especially attractive if the option seller is long-term bullish on the underlying shares. 

  • Vertical Spreads: As with monthly options, a trader may elect to trade vertical spreads in weekly and/or 0DTE options. This includes bull call spreads, bear put spreads, bull put spreads, and bear call spreads. Vertical spreads allow traders to limit their risk, while potentially benefiting from a bullish or bearish move in the underlying. Learn more about vertical spreads and how to trade them.

  • Iron Condors: An iron condor is a neutral options strategy used when a trader expects the price of an underlying asset to remain within a certain range. This approach involves selling an out-of-the-money call spread and an out-of-the-money put spread, simultaneously, on the same underlying asset and with the same expiration date. This approach is often utilized with monthly options, but could also be used for weekly or 0DTE options. 

  • Straddles and Strangles: Much like naked options, a trader may elect to trade a straddle or strangle if he/she expects the underlying to move sideways (short straddle/strangle) or if they expect it to make a big move in one direction or the other (long straddle/strangle). Long straddles/strangles typically benefit from gap moves in the underlying, while sideways movement in the underlying is preferred for short straddles/strangles. While monthly options are often utilized for straddles and strangles, a trader could theoretically use weekly or 0DTE options, as well. 

Investors and traders opting to trade weekly and 0DTE options need to be aware of the elevated risks associated with such positions and evaluate whether these types of options match their overall investment objectives and risk profile. With little time to recover from adverse moves, and increased sensitivity to news and events, the trading of weekly and 0DTE options requires careful risk management and a disciplined approach, as well as extensive experience in the options universe. 

Traders should also be aware that illiquidity in weekly and 0DTE options can lead to wider bid-ask spreads and slippage, making it more challenging to enter and exit positions at desirable prices. Overall, traders should be prepared for heightened volatility in short-term options, and avoid overleveraging with such positions, especially when selling options. Short options - particularly short naked options - theoretically carry unlimited risk. 

How to trade 0DTE options?

When trading zero-day-to-expiration (0DTE) options, traders typically follow the same general steps as trading monthly options. Some of these key considerations for trading 0DTE options are outlined below.

  • Open and Fund a Brokerage Account: Open an options-capable brokerage account, ensuring it offers the necessary tools and features for trading 0DTE options. Fund the account with the required capital to execute trades.

  • Market Analysis: Conduct thorough market analysis to identify potential opportunities for short-term price movement. This analysis may involve technical analysis, fundamental analysis, or a combination of both to determine entry and exit points.

  • Option Selection: Identify suitable underlyings and associated options  based on one’s desired trading approach, analysis, and risk profile. 

  • Position Sizing: Determine the appropriate position size based on your risk profile and account size. Consider factors such as maximum risk per trade, available capital, and desired risk-reward ratio.

  • Order Placement: Use your brokerage account to place orders to buy or sell 0DTE options contracts based on the selected strategy, analysis, and outlook. Traders may use market orders, limit orders, and/or stop orders to enter and exit positions at desired prices.

  • Monitoring: Continuously monitor your positions to assess market conditions, to track price movements, and to manage risk. Traders should be prepared to adjust their positions (or exit trades) if market conditions change, or if the desired outcomes are met.

  • Risk Management: Implement proper risk management techniques to protect capital and minimize losses. This may include setting take-profit orders, stop-loss orders, and/or hedging against adverse price movements.

  • Exit Strategy: Have a clear exit strategy in place to lock in profits or to cut losses based on predefined criteria. Traders may elect to exit a position based on a specific price target, a technical indicator, or a shift in market conditions.

0DTE options risks

Trading short-term options, such as weekly and zero-day-to-expiration (0DTE) options, entails substantial risk. Some of these risks overlap with those that characterize trading monthly or LEAPS options. On the other hand, some of these risks are unique to short-term options, whether they be options listed only for a single day, or weekly/monthly/LEAPS options that are approaching expiration. 

One of the major risks associated with short-term options is the risk of a sudden gap movement. In the case of a long option, this may result in a substantial gain. However, for short options positions gap moves can potentially produce outsized losses. 

From this perspective, short-term options provide limited time for adverse price movements to correct themselves, given their short lifespans. To successfully trade short-term options, market participants need to accurately predict short-term price movements within a narrow timeframe. Moreover, unexpected or adverse price movements can lead to losses, as there is less time for the underlying asset to recover, or move in the expected direction.

As a result of this dynamic, short-term options are more sensitive to changes in implied volatility. Fluctuations in implied volatility can significantly affect the prices of short-term options, leading to rapid changes in option premiums. While increased volatility can amplify gains, it can also magnify losses, making it crucial for traders to monitor and manage volatility risk effectively.

On top of the above, short-term options lack flexibility, because they have fixed expiration dates, and shorter timeframes for making decisions. With weekly or 0DTE options, traders have less time to adjust their positions, and usually don’t have the luxury to wait for the underlying to move in a favorable direction. This lack of flexibility can increase the pressure on traders to make quick and precise decisions, which can lead to suboptimal decision-making, losses, and/or missed opportunities.

Additionally, short-term options may suffer from illiquidity when compared to standard monthly options. Lower liquidity can result in wider bid-ask spreads, reduced trading volumes, and increased slippage when entering or exiting positions. As a result, traders may encounter challenges when attempting to enter and exit trades, which can negatively impact returns. 

Lastly, the frequent trading of short-term options can lead to higher transaction costs and commissions. As such, market participants should carefully evaluate their risk tolerance, trading objectives, and trading experience before engaging in short-term options trading.

Which stocks offer 0DTE options?

Virtually every stock and exchange-traded fund (ETF) that has associated options offers 0DTE options. That’s because all weekly/monthly/LEAPS options eventually expire, and on their final day of trading, all of these options transform into 0DTE options.

Of course, 0DTE options can also be explicitly listed - options that only exist for a single trading session. For example, the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust Series 1 (QQQ) offer explicit 0DTE options. The QQQ is effectively the ETF version of the Nasdaq 100. 

In addition to those well-known index ETFs, many other ETFs - and some stocks - offer short-term weekly and 0DTE options. Because the list is ever-changing, investors and traders should check individual listings to confirm whether a given symbol offers weekly or 0DTE options. 

For more information on short-term options listings, market participants can review this Cboe website

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