0DTE options: should you bet on America's favourite?

The S&P 500 index tends to rise or fall half a per cent in a day – a swing of 50 points or so. That may not mean much to a buy-and-hold investor but, to a trader, it’s enough for a spectacular gain if they employ sufficient leverage. With 20:1 leverage, for example, that half a per cent move in the index means a 10% move in the value of your position.  

But while using spread bets, contracts for difference (CFDs) or futures for that kind of trade will give you much more potential upside, you also have more downside if the trade goes against you. In some trades, the downside is – in theory – potentially unlimited.  

Options are different, of course. With some (not all) options, your maximum loss is capped at the outset. For example, with a long call option, the downside is limited to the premium paid, while the potential gain is much greater if stocks surge upwards. That kind of asymmetric pay-off makes them very attractive to people who are drawn to lottery-ticket-type trades. 

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This helps explain why the powerful bull market in the US in recent years has been accompanied by the increasing use of options by retail traders – and, in particular, an explosive growth in zero-days-to-expiration options (0DTEs), or “dailies”.

What are 0DTE options and how do they work?

A 0DTE is an options contract that expires on the day it is being traded. In the past, S&P 500 options trading activity would be concentrated in contracts that would expire relatively soon, but still had a few days or weeks to run. Today, 0DTEs account for more than 40% of S&P 500 options activity. 

S&P 500 options contracts used to have one weekly expiry. This went up to three days a week and then five in 2022. So there is an index options contract expiring each day, which is very appealing for a trader who wants to take a punt on how the market will move because of a US Federal Reserve meeting… a payrolls report… or Nvidia’s results. They can buy an out of the money call or put and hope for the best. 

Since the option will expire that day, there’s a high possibility that it will expire worthless if it is not already in the money. However, the premium will be small. If the market moves enough to bring it in-the-money, the pay-off can be large. Note, though, that research by the Chicago Board Options Exchange (CBOE) shows that the big intraday swings needed for large gains in 0DTEs are not common – less than 10% of moves are “gap” moves (meaning a two-standard deviation sudden increase in short-term volatility). 

So 0DTEs come with a serious health warning. This kind of trading is high risk for addiction. Once you’ve seen a $5 bet end up worth hundreds, it can be very intoxicating. You can see why traders get seduced into buying them and end up consistently losing money over time.

Can you make money with 0DTEs?

So is there a way to trade 0DTEs with any prospect of success? The characteristics of these trades – a very short time to expiry (so they lose value very quickly through a trading session), a high chance of expiring worthless and very convex pay-offs (small moves in the index can mean a big move in the value of the option) – mean that timing is all important. This doesn’t simply mean timing in relation to the underlying market move, but timing in relation to the expiry of the option. 

Activity in 0DTEs tends to start trailing off by around 11.30am New York time. Canny traders tend to buy the option that has one day to expiry, hold it overnight (when the price will probably gap up or down) and sell it in the morning of the following session (when it becomes the current 0DTE). This trading behaviour accounts for the tighter spreads and greater volume in 0DTEs before noon. 

Consistently successful 0DTE traders will not be those who happen to end the trading day owning options that ended in the money because luck went their way that time. Instead, those who trade the high volatility inherent in these options and then get out before the market dries up, may have a better chance.

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