gamma 0dte options

Gamma for 0DTE Options

By:Anton Kulikov

Daily Options and Gamma

Zero DTE options could be a volatile trade and carry significant amounts of risk but can also be a very profitable trade to those on the right end of it. But did you know that you could manage that risk while still being able to trade the zero DTE options?

The key is to use a combination of long options with short options in the zero DTE cycle to mellow some of that single option risk out.

Gamma and Theta for Zero DTE Options

As we talked about in our article on theta of zero DTE options, they can have up to 100x greater decay as a % of option price than an option trading 45 days to expiration. Since we know that risk must justify a return being paid and vice versa, we knew that the zero DTEs had to have an above average risk to justify the increased theta. In comes gamma.

Gamma is the balancing scale to theta decay. Theta can be used as a measurement of the level of potential return for an options seller, while gamma is the level of risk and exposure for the same options seller. Because of this symmetrical relationship, if theta on an option is higher, then gamma on that same option must also be higher!

Looking at the table below, we can see the gamma present at the zero DTE cycle is roughly 50x bigger than the gamma present in the 45 day cycles.

SPY Gamma ExposureATM Straddle Gamma
8:30 to 10:4010:40 to 12:5012:50 to 3:00
Zero DTE9%22%50%
45 DTE0.2%0.2%0.2%

In fact gamma is at its largest the last third of the day for the zero DTEs just like theta is! Higher risk, higher reward.

If we want to trade the zero DTE options but have our risk be defined, we can choose to use a combination of long and short options to give us a mellower trade that is still in the zero DTE cycle.

SPY Gamma ExposureGamma Risk
8:30 to 10:40am CST
Zero DTE ATM Straddle9%
Zero DTE ATM Butterfly with $3 Wings5%
Gamma Reduction-44%

A popular way to do this is a butterfly that has 2 short options at the same strike and 2 long options equidistant from the short strike. Doing this can reduce the gamma risk by nearly 50% for the first two hours of the day.

Keep in mind though, the effectiveness of risk reduction with out of the money wings goes down as the day draws to a close. Because of this, make sure to manage these zero DTE positions, defined risk or not, in the first half of the day.

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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