What Are Zero Days to Expiration (0DTE) Options?

Zero days to expiration (0DTE) options are unique contracts that must be acted upon the same day they are traded, creating a narrow window for action. Traders use these options for rapid gains or premium collection, but the need for fast decision-making underscores the importance of expertise to mitigate risks.

In recent years, zero-day trading has become mainstream and popular for premium collection and speculation.

Key Takeaways

  • Zero days to expiration (0DTE) options are contracts that expire and become void on the same trading day.
  • Traders engage in 0DTE options to capitalize on quickly decaying premiums and to manage capital over short periods.
  • While potentially lucrative, 0DTE options demand a high level of expertise as they carry significant risk.
  • Popular strategies for 0DTE traders include selling iron butterflies or iron condors to collect premium.
  • Effective 0DTE trading requires understanding premium decay and using hedging techniques to mitigate potential losses.

Understanding the Mechanics of 0DTE Options

An option is a contract that gives the buyer the right—but not the obligation—to buy or sell an underlying asset at a specific price within a specified period. Each option contract comes with an expiration date. If the option isn’t taken up by then, it becomes useless and is no longer valid.

With zero days to expiration options, the expiration date is imminent. The 0 before DTE indicates that this is the last day to make use of the option. Usually, traders have time to wait and see if the asset moves as they bet. That’s not the case with 0DTEs. At this late stage, time is of the essence.

For some traders, the last day before expiry is the best moment to invest in options. Traders like 0DTE options because they allow an opportunity to capitalize on positions quickly and tie up capital for short periods. Entering and exiting trades on the same day also eliminates the risk of the price moving overnight while the trader is asleep and not in front of the computer screen.

Assessing the Profitability of 0DTE Options

Selling and buying options at zero days to expiration can be extremely lucrative or costly. The stakes are high at this late stage, and a lot can happen in a day.

There are mixed tales about this type of investment strategy. Numerous stories have surfaced of people getting burned, leading 0DTE options to be labeled as the equivalent of a lotto trade. When buying an option on the last day before expiry, there’s lots of pressure for the predicted move to happen fast. Use 0DTE options only for high-conviction trades and hedge them in case things go wrong.

For option writers, 0DTE trading is generally much more popular. There are many people out there who swear by this strategy, claiming that it’s possible to make potentially large profits without taking on much risk by selling options that expire within a day.

Important

 0DTE options are often traded to take advantage of the exponential decay of premium. 

Who Trades 0DTE Options?

0DTE trades are popular among option writers. The play is to offload on the last day that the option is valid and collect the rapidly decaying premium.

Premium Decay

When purchasing an option, you pay the person selling it (the other party in the trade) for the privilege of giving you the right to buy the underlying asset at the specified strike price. That payment or charge is known as the premium.

Usually, options more likely to be exercised command higher premiums. That means that those “in the money” are more expensive than those “out of the money.” It also generally means that the cost of an option steadily decays as it moves closer to the expiration date and rapidly decays on the last day.

Fast Fact

The most popular strategy used by 0DTE option traders is to sell an iron butterfly or iron condor, according to Option Alpha.

Lots of traders try to take advantage of the last day of action. Their goal is to collect premium, and they have the edge of time being on their side and the ability to set the strike price.

The strategy here is to open the position in the morning, hold it until the desired premium has been collected, and then either repurchase the option for a lower price before the end of the day or let it expire. If everything goes well, the trader makes a quick profit.

Trading Expertise a Must

Despite online claims, selling 0DTE options isn’t a surefire way to get rich. A lot can change in a day, and something that seemed certain in the morning may end up backfiring in the afternoon.

Experienced traders are more likely to get prices, timing, and other factors right. A novice trying to get rich fast without doing their homework could be left nursing a really nasty loss.

Warning

Don’t believe that premium collecting is foolproof. Knowledge of how to execute and hedge these trades is needed, and market catalysts may not pan out as expected.

Optimal Securities for 0DTE Option Strategies

Most stocks, exchange-traded funds (ETFs), and indexes are optionable. However, some are much more popular than others.

0DTE traders usually choose stocks with high volume and frequent expirations. Classic examples include ETFs that track the S&P 500, the Nasdaq 100, or the Russell 2000.

Tip

Stop-loss orders should be used to prevent catastrophic losses.

What Does DTE Stand for in Options?

DTE is short for “days to expiration” and basically tells us how many days the right to buy or sell an underlying asset at the specified price is available. Once this time is up, the option is rendered null and void and expires worthless.

When Do 0DTE Options Expire?

A 0 before DTE signifies that the option is set to expire that same day.

What Happens If the Option Isn’t Exercised Before It Expires?

Option buyers are not bound to fulfill the contract. If it is not acted upon by the specified date, the option simply expires. In this case, the buyer would walk away empty-handed and lose whatever sum was paid to the writer (the premium) for the opportunity presented.

The Bottom Line

Zero days to expiration (0DTE) options can be attractive for traders seeking quick profits due to their potential for premium decay. However, these options are not a guaranteed, easy money strategy. They are highly volatile and complex, requiring a strong understanding and careful risk management.

While 0DTE options can be a valuable tool for experienced traders, they can also result in significant losses if improperly handled. Traders must thoroughly understand the strategies involved and only engage in high-conviction trades, considering hedging to mitigate potential risks.