Zero DTE: Comparing Single Options vs Spreads
Zero DTE: Comparing Single Options vs Spreads
Which strategy provides the most leverage?
- Zero DTE spreads can give you more leverage than a naked option when you are right directionally.
- Trading spreads is more consistent and will lead to more profitable trades, on average, than buying naked options
- Naked options will make the most in a large market move, but statistically, those are exceedingly rare.
When we trade the zero DTE options, a lot of traders love the action available because of the ability to play a little money to make a multiple, all in one day. Add to the fact that trading index zero DTE options settle to cash meaning that you could trade all the way to expiration without worrying about assignment and the capital requirements associated with assignment.
Most people think that the way to get the maximum exposure per dollar of capital used is to buy naked options (either a put or a call) because of the undefined profit potential associated with it. When we trade spreads, however, our profit is limited. Therefore, when people compare the profit potential between a naked option vs a spread, they automatically think of the spread as lower risk and lower exposure.
However, spreads are not always lower profit potential than naked options. In fact, most of the time, on a dollar-for-dollar comparison, buying spreads can return more than a naked option on a percentage basis.
Allow me to explain:
Statistics behind zero DTE spreads and naked options
SPY Zero DTE Longs | Total P/L as % of Debit Paid When One-Day Move in S&P 500 Exceeds Expected Move | Total P/L as % of Debit Paid When One-Day Move in S&P 500 Exceeds Expected Move | ||
Long 50 Delta | Long 30 Delta | |||
Naked Long | +79% | +51% | ||
Short Option $10 Width from Long | +126% | +223% | ||
Short Option $20 Width from Long | +166% | +120% | ||
Short Option $25 Width from Long | +143% | +98% |
Check out the full segment here.
As we see, when there is a moderate move in the S&P 500 Index (approximately 20 points at the time of this article), we see that the spreads outperform the naked long options on a percentage basis because the spreads cost less than a naked long option. As an example, let's say that you wanted to put $1,000 into a zero DTE trade, and a single long-call option would cost you $1.000. But if you did a spread with the same long call and added a short call, the total cost would only be $700. Let's say that the market moved, and the call was then worth $2000, but the spread is only worth $1500 because the risk is defined. On a percentage basis you made more on the spread.
- Spread: Worth $1,500 - cost of $700 = Profit of $800. That's a 114% return.
- Single Option: Worth $2,000 - Cost $1,000 = Profit of $1,000. That's a 100% return.
This works most of the time
In theory, you could do multiple spreads for the same amount of money that you could put a single option on and then on a dollar basis you would make more most of the time.
We say "most of the time" because at the end of the day, the spread is still profit defined, so if you had a big blowout move in the market, the naked options would outperform across the board, however, those are exceedingly rare.
Spreads make for a much more consistent and probable trade to make money on than just buying an outright option even though the thought of unlimited profit on a 50-point S&P 500 move is alluring.
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, and contributes research content for Luckbox Magazine.
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