Two Basic Lessons From the Zero DTE Option Frenzy
Two Basic Lessons From the Zero DTE Option Frenzy
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.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.