Zero Days to Expiration (0DTE) Options: A Starter Guide

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Contributor, Benzinga
May 16, 2023

Every Friday, millions of options expire. Some of these options expire worthless, while others yield extraordinary gains for traders. While it’s possible to trade options that expire in a few months, a growing number of traders have been entering zero days to expiration (0DTE) options. These options are the epitome of high risk, high reward. This article will explore why 0DTE options are like this and things to keep in mind before getting started.

What Are 0DTE Options?

0DTE are options that expire on the same day. You cannot enter these positions before the market closes and wait the next day for pre-market price movements. Other than the close expiration date, these options are just like any other. You won’t have to sweat it out for multiple weeks to see whether your option is profitable. 0DTE options warrant quick trading and a conclusion before 4 p.m. Eastern Time. 

Not all brokers let traders enter 0DTE option positions. If you want to use this strategy, it’s important to find a top options broker that enables these trades.

How Do 0DTE Options Work?

0DTE options have low premiums that reflect their low probability of generating profits for long options traders. This arrangement results in many options expiring worthless, but a dramatic price swing in your direction can yield significant gains. Some traders gravitate toward these options because of the lower premiums. You can pay a lot more for an option that expires in four weeks and still watch it expire worthless.

What Kind of Trader Typically Uses This Strategy?

ODTE options aren’t for everyone. Traders involved with these options may have limited capital to allocate for options. Instead of paying a higher premium for a lengthier expiration, these traders get more options with their limited resources. Options traders don’t lose much money for each option that expires worthless, but it can add up if you enter large positions that don’t pan out.

0DTE options also attract traders who want the maximum return. The premium works against options buyers because it increases the breakeven price. Because 0DTE options have lower premiums, it’s easier to break even and become profitable if the stock quickly moves in your direction.

While some traders see 0DTE options as an opportunity for high returns, other traders see them as a way to secure quick profits. Some options traders sell 0DTE options to open positions. This strategy is risky if the stock’s price moves sharply and increases the option’s value, but these traders know it’s highly unlikely that 0DTE options become profitable before expiration. Some traders prefer to play both sides. They sell 0DTE options to realize highly probable profits and buy some 0DTE options hoping for moonshots.

How Does Theta Work on 0DTE?

Theta is the Greek letter that measures time decay. As an option gets closer to expiration, Theta declines. That’s why an option that expires in a year has a higher value than an option that expires in one week, assuming everything else is equal. Theta decay amplifies as an option gets closer to its expiration date. For 0DTE options, theta decay happens rapidly, even if the stock stays at the same price or barely inches in your direction. Traders need a significant movement to realize gains from a 0DTE option.

Are 0DTE Options Profitable?

Any option can become profitable, including 0DTE options. While 0DTE options have a lower chance of being profitable, these derivatives can score outsized gains compared to options that expire later. The small premium makes it easier to profit from options if the stock’s price moves swiftly in your direction. The margin of opportunity is narrow, but traders who get the timing right on 0DTE options can get rewarded.

0DTE vs. DTE Options: What Are the Differences?

0DTE options and DTE options both have shorter timeframes than other options. However, a DTE option has one additional day. A trader can buy a call or put on a Thursday that expires on a Friday to capitalize on volatility after hours. A DTE options trader has a little more time than a 0DTE option trader for the stock to reach the breakeven price.

Although DTE options traders have an extra day before expiration, that perk comes with a higher premium. You may end up with fewer option contracts, which means less upside. 

Example of Using This Strategy

Assume a stock valued at $100 per share has an option expiring on the same day with a $102 strike price. Because the option expires on the same day, the premium will not be too much. The trader in this scenario can secure a 0DTE call with a $102 strike price for a 10-cent premium. The trader decides to pay $1 to purchase 10 calls. 

The option will quickly lose value and expire worthless if the stock decreases, stays flat or barely inches up. However, a stock can experience significant price movements behind breaking news and developments. Assume the stock reaches $104 per share, and the trader exits their options positions shortly before expiration.

The trader, in this example, secures a $1.90 profit for each 10-cent option. The trader’s $1 turned into $19, excluding commissions. If you buy large quantities of options, it’s better to get a flat-rate fee than pay for every option contract in the order. While dramatic price movements like these are rare, 0DTE options traders embrace the strategy for its affordability and high profit potential.

Possible Rewards of Trading 0DTE Options

Trading 0DTE options can provide the following advantages for options traders:

  • Significant gains: 0DTE options have lower premiums than other option contracts. The lower premium gives traders the potential for significant gains that outsize other options. 
  • 0DTE options involve less time: You don’t have to look at an option’s performance over several weeks. Some traders exit long-term options too early or hold onto a profitable option for too long. 0DTE options expire on the same day, which means you won’t have to worry about them over the weekend.
  • Easier to get started: Premiums can get expensive, especially if you look at volatile stocks with high price points. Selecting an option that expires in several months will only make it more expensive to open a position. Because premiums are lower for 0DTE options, it’s easier to get started.

Risks of Trading 0DTE Options

Any investment has risks, including 0DTE options. Here are some things to consider before trading these options.

  • Theta decay is rapid: 0DTE option traders do not have much time for the stock to move in a favorable direction. Theta decay will eat at the option’s value.
  • The stock needs to experience a significant move: 0DTE options traders need stocks to move quickly and in the right direction to secure profits. Time is the key weakness in a 0DTE option trading strategy. Traders can counter this disadvantage by using small sums of money for their 0DTE option trades.
  • Profits are less likely: A flat stock price, the stock swinging in the wrong direction or the stock barely moving in the right direction can all result in a 0DTE option expiring worthless. While these disadvantages are present, the gains you make from a single 0DTE option can recover many of the losses from 0DTE options that expired worthless.

 Trading Options with Hours to Spare

0DTE options move rapidly. The approaching expiration date requires favorable stock price movements in a hurry. Effectively timing entries and exits into 0DTE options can help traders realize higher profits, but traders should assess their risk tolerances before getting started.

Frequently Asked Questions

Q

Should you buy 0DTE options?

A

These options are risky, but low premiums can make them enticing. Traders should assess their risk tolerances before getting started.

Q

Can you sell 0DTE options?

A

Yes, but the strategy has risks, and you should have a hedge to limit losses. While you are likely to profit from 0DTE options expiring worthless, a surprise movement can result in unexpected losses.

Q

Are 0DTE options risky?

A

Every option and investment is risky, but if you get further out of the money and select a closer expiration date, the option becomes riskier.