zero DTE options

Zero DTE Options: Risk of Naked Short Premium

By:Anton Kulikov

When someone interested in finance and trading hears about zero DTE options for the first time, one of two things usually crosses their mind: “wow what a cool opportunity!” Or conversely “it’s literally just another way to gamble while calling it ‘active trading’.

Regardless of how cynical or excited you consider zero DTE options to be, there is no denying that it has caused a ripple effect throughout the world of finance especially among the active trader community.

Before zero DTE options emerged as a $1 trillion dollar per day market, options already were considered to be unique way to trade and grow an investment portfolio over the long term. Options allow the trader full and complete control of their risk-reward, probability of profit, and duration of their trades.

Options traders would usually sell puts or calls to bet that the underlying stock would not make a move that exceeded the strike price on the put or call…this “rangebound” style of trading was attractive to those that didn’t necessarily have a strong directional opinion on the stock market but wanted to make money as long as the market acted within “expectation”.

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

Zero DTE options take a slight departure to the traditional way of selling options premium over 30-to-60-day cycles…instead of making a trade to bet on the market’s range over the next month, you could now bet on the market’s range over the next few hours.

Traders realized that they could take the same concept they utilized in the longer-term plays and apply them to the zero DTE options and collect significantly more premium on a day-to-day basis than they could over a longer timeframe when normalized on a daily basis…in fact, doing the same short options strategy in the zero DTE cycle compared to the 45 DTE cycle yielded between 5 to 6 times more premium collected.

0DTE options risk:

The risk, however, was a tough pill to swallow. On a day-to-day basis, the same move in the market resulted in roughly 30x greater risk for the zero DTE short options compared to the 45 DTE strategy.

All this to say, when integrating a new strategy into your portfolio, the question you ask should always be two-fold: how much can this strategy make relative to the amount of risk that I am taking? In many cases, you will find that the additional risk you are incurring, even for a higher profit potential, may not be worth it.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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