0DTE options (zero days to expiration) are options contracts that expire on the same day they’re traded. Even though the expiration date on these contracts is fast approaching, 0DTE options can offer traders quick returns, allowing them to collect premiums while also taking advantage of short-term volatility. They’re especially popular with day traders who need to wrap up all their business in a single day and traders with smaller accounts who can benefit from the accessible nature of these options.
While 0DTE options can be lucrative, they carry significant risks, especially when it comes to the factor of time decay. After all, traders only have a single day to turn and profit, or else the contract expires as worthless by day’s end! This guide will walk you through all the ins and outs of trading 0DTE contracts and how you can turn a profit with success. Learn the best times to trade these contracts as well as the best tools and platforms to use while trading kind of options.
What Are 0DTE Options?
0DTE options are options contracts that have zero days until expiration. What this means is that traders only have one day to realize a profit before the option expires as worthless. Getting 0DTE options to work in your favor can only be done in the course of a single business day, so these options are somewhat popular with day traders who always close out all of their positions by the end of the day.
0DTE options are commonly traded on major indexes like the S&P 500 Index (SPX) and the NASDAQ 100 Index (NDX). When it comes to ETFs, 0DTE can be traded on Invesco QQQ Trust (QQQ) and the SPDR S&P 500 ETF Trust (SPY).
0DTE options differ from regular options in terms of time decay, risk profile, and several other factors:
- Expiration Date: While regular options contracts typically have expirations that are well beyond the end of the current business day, 0DTE options have expiries that occur at the end of the current day. This gives traders much less time to realize a profit. 0DTE options lose their value much quicker as a result.
- Volatility: ODTE options are more volatile than other options contracts due to the short timeframe before the expiration date. This higher volatility environment leads to larger price swings, which can have a profound effect on the trader’s profitability.
- Liquidity: Regular options have narrower bid-ask spreads, and they’re much easier to enter or exit quickly, while 0DTE options have wider spreads, which can create issues for the trader to realize a profit. They’re also less liquid than traditional options, so it’s more difficult to enter the positions at a good price and sell for the amount of profit you’re looking for.
- Price Sensitivity: Unlike regular options, 0DTE options are more sensitive to market movements due to the constricted timeframe. While this can present a problem in some cases, traders can generate a profit from using short-term trading strategies based on rapid price fluctuations.
Why Trade 0DTE Options?
What’s the upside of trading volatile options that expire by the end of the day? It sounds like it’s too risky. When you look into the matter a bit further, you’ll find there are many advantages to dealing with 0DTE options, but that’s only if you’re an experienced trader who knows how to handle highly volatile contracts. 0DTE options aren’t a good choice for beginners or the inexperienced.
- High Leverage: 0DTE options have lower capital requirements for setting up positions due to the reduced time value. The leverage that traders can experience here will magnify potential returns.
- Quick Profits: Because the expiration date happens at the end of the day that you open the position, traders who deal with 0DTE options can realize quick profits when they play their cards right.
- No Overnight Risk: Because 0DTE options expire just after the market closes at 4:15 PM (EST), traders carry no overnight risk. This makes these kinds of options less expensive than those that have several days until their expiration date.
- Frequent Trading Opportunities: Another upside to these options is that they offer frequent trading opportunities within a single business day. 0DTE options are available nearly every trading day for certain indexes. There are multiple opportunities available on popular stocks and indices that offer weekly options.
- Used by Both Retail Traders & Institutions: Liquidity and volume make them appealing to both retail traders and institutional investors. However, they are best used by experienced traders due to their high volatility.
Risks and Challenges of 0DTE Options
We’ve already alluded to some of the more significant risks in trading 0DTE option contracts, but we’d like to outline all the risks and challenges here to give you a clear understanding of the potential downsides that come with these investments.
- Rapid Time Decay (Theta Decay): When you’re discussing the idea of options contracts losing their value as they approach their expiration date, there’s perhaps no other kind of options contract where that risk is any higher than with 0DTE options. These contracts and their value deteriorate quickly, giving traders only a single business day to turn a profit from the position.
- Extreme Volatility: 0DTE options are extremely volatile, and they aren’t the best choice for newer traders with little experience. These options are highly sensitive to rapid price changes, and these large price swings can lead to fast losses. Plus, environments with high volatility and expected price swings can inflate the premiums of these contracts.
- Bid-Ask Spread Considerations: Traders want to use options contracts with narrow bid-ask spreads so they can create as big a profit as possible, but 0DTE options often have wider spreads, which can impact profitability.
- Emotional Trading Risks: Trading 0DTE offers no margin for error, which can result in a high-stress environment for traders, which can often lead many to make decisions based on emotions like uncertainty or fear. Trading 0DTE options requires discipline and strong risk management.
How to Trade 0DTE Options Successfully
To give you a better understanding of how to trade 0DTE with success, we’ve outlined a rough guide of the steps you can take to select the right underlying assets, choose an effective strategy, and effectively monitor and manage risks along the way. Follow these step-by-step instructions to get started today.
Choosing the Right Underlying Assets
Going about choosing the right underlying assets is as simple as going to the major indices and selecting the position you’d like to take on. For trading options, you can find 0DTE contracts on indices like the S&P 500 Index (SPX) and the NASDAQ 100 Index (NDX). When it comes to trading ETFs, check out Invesco QQQ Trust (QQQ) and the SPDR S&P 500 ETF Trust (SPY) by the respective 0DTE contracts.
If you’re looking for individual stocks, use only those that come with high liquidity.
Key Trading Strategies
The next step is choosing an effective trading strategy that makes sense for the current market conditions and that will help you generate a profit before the close of business. Keep reading to learn about which strategies work best in which environments, so you can begin trading 0DTE options with the best of them.
Buying Calls or Puts (Directional Trades)
Traders buying call options believe that the underlying asset will go up considerably before the close of business, while those buying put options expect to see a significant drop in the stock price.
Either of these strategies is suitable for strong market trends. If the market is trending strongly in a single direction, it might be a good idea for the trader to use either one of these directional trades. Another good scenario for buying calls or puts on 0DTE options is when you anticipate a possible market reaction to certain news or events that occur within the trading day.
Pulling off these moves with success requires precise timing and stop-loss management. There’s the risk of time decay as the end of the business day draws near, small market movements affecting the value of the stock price or the total loss of the premium if the market fails to move in the desired direction.
Selling Spreads (Credit Spreads, Iron Condors)
The iron condor and credit spreads are two strategies where the trader creates a “spread” by buying and selling options with different strike prices and expiration dates and then selling the spread for a credit. Taking advantage of rapid time decay, selling spreads is a way for the trader to realize a profit if the spread increases in profit by the end of the business day when the spread is sold.
Selling spreads like iron condors and credit spreads are both a defined risk approach (compared to naked options) where the maximum loss potential is the space between the strike prices minus the amount the seller receives for the sale of the spread. When it comes to 0DTE options, selling spreads is a creative and versatile way for traders to profit but also manage their risk well.
Scalping 0DTE Options
Scalping 0DTE options isn’t for the faint-hearted. This fast-paced technique should only ever be used by experienced traders with a keen eye for market conditions and technical analysis.
This high-risk strategy has traders performing quick in-and-out trades to capture small price movements. Traders profit from multiple small gains by entering and exiting a high volume of positions after they’ve done some thorough technical analysis and looked carefully into the current market volatility. Scalping requires precise execution because the trader needs to capitalize on fleeting price fluctuations to secure a profit in a limited time frame.
Many traders who scalp 0DTE options rely on advanced trading tools to find success with this strategy. For proper technical analysis, traders take advantage of real-time market data, chart patterns, and other technical indicators to determine the proper entry and exit points. For fast execution, they use advanced trading algorithms and trading platforms.
Straddle & Strangle Strategies
Straddles and strangles can be used by 0DTE option traders if they’re expecting big moves but are uncertain about direction. Both of these trading strategies are often used ahead of major news events or economic reports. In range-bound markets where the price is expected to fluctuate between a range for an extended period, 0DTE option traders might want to use the short straddle or strangle. For volatility plays, traders should be using the long straddle or strangle to profit from volatility without getting the market direction correct.
Risk Management Tips
Now that you’re familiar with the best strategies for trading 0DTE options based on the current market conditions, let’s get you up to speed on the risk management practices you can put into place to keep yourself as guarded as possible from all the other angles.
- Stop Loss Orders: Sometimes it’s best to quit when you’re behind, and that’s why it’s key for options traders using 0DTE contracts to have some stop-loss orders set to limit potential losses before they get too out of hand. Stop-loss orders would sell the position if it’s long or buy the position if it’s short.
- Correct Position Size: To keep themselves from being overexposed, traders need to use a conservative position size, typically 1% of their total capital being allocated to any given position, including those in 0DTE option contracts. If you’re feeling like you want to take some more risk for increased profit, you could consider using 2%, but it’s generally recommended to stick with 1% to minimize losses as best you can.
- Don’t Hold Until Close: As best as you can, try to secure your profit and close out the position long before the closing bell tolls. It’s a good practice to avoid holding through market close (unless necessary) to steer clear of potential losses or missed gains. The closer the option gets to the end of the business day, the more time value it will lose, making an early close out the best possible course of action.
- Pre-Defined Trading Plan: Before choosing your 0DTE option, run an analysis of the current market conditions and use technical indicators to examine each position. Once you have these data points compiled, put together a realistic,pre-defined trading plan before entering a position. This can help you stick to firm entry or exit points.
Best Times to Trade 0DTE Options
Much of the success that traders have with 0DTE options is that they’re well aware of the best times of the day to pull off these moves. Each portion of the trading day presents new opportunities for traders to use different strategies to take advantage of the expected conditions.
- Market Open (9:30 AM – 11:00 AM ET): The conditions for this segment of the day are characterized by high volatility and unpredictability. Selling short strangles at market opening and then closing them out after 90 minutes generally results in some profitable trades.
- Midday (11:00 AM – 2:00 PM ET): Traders will often find that the middle of the day is much quicker and is well-known for itslower volatility, which makes this a prime time for executing some credit spreads that take advantage of rapid time decay (0DTE will begin to lose their value quickly during this period).
- Power Hour (2:30 PM – 4:00 PM ET): This part of the business day is where you can expect some high action, especially for directional trades. The final 30 minutes in particular are a time when traders will want to avoid selling short premiums due to the market volatility that could lead to some major losses.
Tools & Platforms for Trading 0DTE Options
Check out our favorite online trading apps, which can offer you the best brokers for fast execution and prime opportunities for securing profits with 0DTE options.
Best Brokers for Fast Execution
Best Charting Software For Intraday Analysis
Best Option Scanners
Final Thoughts: Is 0DTE Trading Right for You?
0DTE trading is best for experienced traders who don’t mind the stress of a fast-paced trading environment or taking on the risks that come with securing a profit within a single day. 0DTE is a great choice for day traders, in particular, who are used to and familiar with these timeframes. If this sounds like you, there’s a good chance that 0DTE trading is right for you.
There’s certainly a high-risk, high-reward nature of 0DTE options, which requires the need for strategy, discipline, and risk management. You’re guaranteed to run up against challenges like rapid time decay, a high volatility environment, and the temptation to fall into emotional trading patterns (which could cause you to spiral out of control). However, you can realize a quick profit if you know what you’re doing and you can enjoy magnitude returns due to a higher amount of leverage at your disposal. And there is no overnight risk!
Before trading 0DTE options, we’d encourage anyone reading this to practice in a simulated environment before trading live capital, be it through demo accounts on your trading app of choice or with paper trading.
