Theta for 0DTE Options

Theta for 0DTE Options

By:Anton Kulikov

Daily Options and Theta Decay

Zero DTE options are notorious for being high-risk, high-reward plays. One of the keys to understanding how this risk-reward is measured is to understand the option Greeks, specifically theta decay.

Theta is a measurement of time decay for options. Generally, the longer-dated the option, the smaller the theta decay will be. Conversely, zero DTE options have a very large theta decay which means that the price of a zero DTE option will decline at a very rapid rate as the expiration nears. Why is this important?

The key to being a successful trader is to be able to manage risk and to not allow a single trade to overexpose a portfolio. We studied zero DTE options decay and compared them to an option that is trading 45 days out. We found that the theta decay on a zero DTE option is nearly 100x faster than a 45 day option as a % of the total premium (see below table).

SPX Zero DTE Theta DecayATM Straddle Decay Per $1 of Premium
8:30 to 10:40am CST
Zero DTE-26¢
45 DTE-0.3¢

A 45 Day option decays roughly 0.3 cents per dollar in the first 2 hours of a trade being placed. However, a zero DTE option sees roughly 25 cents of decay per dollar of premium in the first two hours of the trading day.

0DTE Options Risk and Reward

This means that, all else equal, a zero DTE option can provide 100x greater return than a 45 DTE option if you are selling premium. Keep in mind however, that markets are hyper efficient at pricing risk and return so that a certain return must have a commensurate amount of risk being taken to justify the return being paid.

If a zero DTE option has a 100x greater potential return that it will pay to those selling it, then it must in some form carry the commiserate amount of risk to justify 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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