Zero DTE 101

Two Basic Lessons From the Zero DTE Option Frenzy

By:Anton Kulikov

More than 50% of all option trading volume at the CBOE consists of zero DTE volume. Here is what you should know.

  • Zero DTE options are powerful tools, but they can be risky if you don't know what you are doing.
  • The biggest opportunity that these zero DTE options provide to traders is the ability to learn how options work very quickly, since each day is a new occurrence where you can try out your trading strategy.
  • Managing risk is critical to keep an account solvent. Make sure to define your risk with these zero DTE options because a huge market move on the same day is usually not defendable and your exposure is magnified.

Zero days to expiration (zero DTE) options became very popular in 2022. And now, over 50% of all option volume recorded by the Chicago Board Options Exchange (CBOE) consists of zero DTE volume.

A lot of people are afraid of missing the boat and are wondering how they can get in on the action without doing something stupid and blowing up their account.

Let's talk about the opportunity that you have with zero DTE options and how you can keep your risk to a manageable amount.

Identifying new opportunities

Zero DTE options are unique in that they allow people with all account sizes to experience market engagement unlike any other asset class.

You get to see the life cycle of an option that would normally take a week or longer to play out, now in just a few hours.

The biggest opportunity, therefore, that these options give is the accelerated learning curve where you can be engaged in the market and learn about how options work, all during one trading day.

Additionally, you can rinse and repeat the next day which means you get a sense of certainty of your strategy because the number of occurrences that you can get is each day you trade.

To know if a trade makes money, you need a sizable data set. With zero DTE options, every day means one more independent data point.

Managing risk effectively

The biggest pitfall that traders can fall into when trading these zero DTE options is the risk management is very different than trading longer-duration options. In fact, the zero DTE options could carry 50 times the immediate risk compared to an option that has a medium timeframe, 45 DTE.

The key thing to know about risk management in these short-term options is that it's necessary to define your risk with long wings. On any given market day, the market can truly do anything. Knowing your max profit and max loss on a trade will save you from whiplashing market moves from which there is no recovery.

We summarize this concept in this edition of Market Measures, created by the research team at tastylive.

Combining risk management tactics with the opportunity that the zero DTE option market provides, you can become a learned trader very quickly while risking a defined amount that works for any account type.

Anton Kulikov has a decade of trading experience. He leads research content creation at tastylive, appears on over 20 live shows including Futures Power Hour, Options Jive, and Research Specials LIVE co-authored bestselling investment strategy book Unlucky Investor’s Guide to Options Trading, contributed research content for Luckbox Magazine.

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.

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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