The High-Risk, High-Reward World of 0DTE Options Trading
Zero Days To Expiration (0DTE) options are options contracts that expire the same trading day they were purchased. They are volatile, highly leveraged bets in which small price changes in the underlying security can generate large, sudden profits or significant losses for the trader. 0DTEs are primarily used by experienced day traders who can react in minutes or seconds to sudden price changes.
Retail investors, especially those who began trading at the birth of the meme stock craze, are increasingly drawn to 0DTEs, lured by the opportunity of quick profits and immediate gratification.
How Do Zero-Day Options Work?
Options contracts give buyers the right, but not the obligation, to buy or sell an asset at a specified price and time. If the price of the underlying asset has moved against an options buyer, they can let the contract expire and only lose the premium (the price they paid for the option.)
The seller (options writer) receives the premium the buyer pays for the option but is obligated to either deliver the underlying asset at the agreed-upon price or buy an offsetting position if the buyer exercises the option, regardless of what it is selling for.
0DTE options compress all this activity into a few hours. There is no difference between single-day zero-day options and weekly, monthly, or quarterly options on the day they expire. (The expiration dates for quarterly options are particularly turbulent trading days known as Triple Witching Days.)
Why Are Zero-Day Options So Popular?
There are several reasons that zero-day options are so popular. Among these are:
- Higher Leverage: 0DTE options cost much less than longer-dated options for the same exposure since they only have hours to gain value. This allows the trader to control a larger position with the same amount of money.
- Amplified Potential Returns: This higher leverage can generate thousands of percent higher returns than from other investments.
- Quick Trades: 0DTE options settle at the end of the day if not exercised earlier.
- No Overnight Risk: Since 0DTEs settle the same day they are written, there is no risk of overnight events affecting an investor’s position when they cannot act.
Speculating on intraday volatility to score quick and perhaps substantial profits may be the most popular reason individual traders invest in zero-day options.
Risks and Pitfalls of 0DTE Options Trading
While 0DTE options have notable upsides, the downsides can be substantial. Risks in trading 0DTE options can include:
- Requires Substantial Expertise: Trading options requires tracking many moving parts, and 0DTE options throw this at an investor at warp speed. If a trade moves against them, there may not be enough time before the end of the day for it to recover.
- Extreme Volatility: The substantial leverage offered by 0DTE options means that the tiniest movement in the underlying asset's price greatly magnifies the option's value, both up and down. The 0DTE option trader must be constantly on guard against this volatility to prevent losses.
- Low Success Rate: Buyers of 0DTE options expecting quick riches will soon discover that the internet has vastly undersold how difficult it is to make money this way.
- Sellers of 0DTE options that don’t own the underlying asset expose themselves to unlimited losses if the counterparty (buyer) exercises the option at a large profit for themselves.
A Hazardous Path
0DTE options can be alluring with their promises of potentially outsized profits, but even experienced and savvy investors should approach these risky trades with caution. It takes experience with options trading and constant attention to price movements to deal with the additional sources of uncertainty inherent in 0DTE options.
If you decide to trade zero days to expiration options, keep in mind that their compressed volatility and risk can make it difficult to consistently earn profits.