What are Zero Day to Expiry (0DTE) options?
Zero Day to Expiry options, or 0DTE options, has surpassed US$1 billion in daily trading volume. Why is the asset so popular and how can you trade it?
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What are Zero Day to Expiry (ODTE) options?
Zero Day to Expiry (0DTE) options, also popularly known as same day expiration options, are all the rage right now (in the world of trading, at least!). As the name suggests, these are contracts with less than one day to expiry - when they will become void.
They work in a similar way as longer-term options, which are contracts that give traders the right (or option), but not an obligation, to buy or sell a specified amount of an underlying asset at a specified strike price by a specified date.
0DTE options are issued every week from Monday to Friday. They are available for indices - on the exchange they are primarily traded on the S&P 500 (SPX), though NASDAQ (NDX) has a similar offering with smaller volumes.
With us, you can trade on 13 indices including both SPX and NDX, plus a number of forex pairs and commodities.
S&P 500 (SPX) 0DTE options: what should you know?
While short-term option contracts are not a new thing, these daily options went mainstream during the meme stock mania in 2021. 0DTE options were used by retail traders as a low-cost way of trading the rising and falling price of meme stocks (stocks backed by a community of traders on discussion forums such as Reddit) like GameStop and Tesla.
This soon led to the inclusion of indexes in 2022, after various retail brokers began to offer same day expiry options on the S&P 500 index on their platforms.
Institutional investors also jumped on the bandwagon in a big way that same year, so much so that only 5.6% of the all the S&P 500’s short-dated options volume in November 2022 came from retail market orders, a JPMorgan study revealed.
According to JPMorgan, one-day option contracts tracking the SPX peaked at a record US$1 billion in daily trading volume in March 2023. In view of 0DTE options’ lightning popularity, Marko Kolanovic, a leading strategist at JPMorgan, warned that ‘Volmageddon 2.0’ (a repeat of February 2018, when short-term exchange-traded products lost over 90% of their value overnight) could be triggered if the current pace of adoption keeps up.
What are the risks of trading 0DTE options?
Just like almost any other asset, trading ODTE options come with its own set of risks, says IG senior analyst, Axel Rudolph. They include:
1. Sudden changes in prices of underlying assets
The prices of the underlying assets can move very quickly and unpredictably, especially on days when major economic data such as Non-Farm Payrolls, CPI, rate announcements, etc. occur. When selling 0DTE options and the market moves against you, you can lose a large amount of money in a very short space of time.
2. Shorter reaction time
Because 0DTE options expire on the same day they are traded, a trader needs to react very rapidly to any change in the underlying market. This can create a lot of stress and means that market players need to constantly monitor their options trade(s) but this may not be possible for most traders, potentially leading to large losses within sometimes minutes.
3. Rapid time decay
If you buy 0DTE options, the rapid time decay in the option works against you and you need to be right quickly in order to make profit.
What are the rewards of 0DTE options?
Similarly, there are also rewards to be reaped from trading 0DTE options. In Rudolph’s perspective, they are:
- If you sell 0DTE options, you may benefit from large time and thus premium decay, which can lead to quick and substantial profits in a short space of time
- A lot of people get a buzz from the fast-paced nature of trading 0DTE options as they usually trade with a lot of volatility
- You can potentially reap huge rewards in a short space of time if you get your 0DTE option trade right
How to trade Same Day Expiration options
0DTE options summed up
- Zero day to expiry options, known as 0DTE options in short, are option contracts that expire on the same day that they are traded
- 0DTE options are available for stocks, exchange-traded funds (ETFs) and indexes (such as the S&P 500 index)
- 0DTE options tracking the SPX peaked at a record US$1 billion in daily trading volume in March 2023
- There are both risks and rewards involved in trading these same day expiration option contracts, so individuals should study them in detail or practise via a demo account before placing any trades
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