You may have heard of 0DTE Options but have no idea what it means. It has to do with the expiration date of an options contract. Traders specifically use these types of options in their strategies and I am going to show you how to do it.
Table Of Contents
What Does 0DTE Mean
Options have expiration dates and that is specifically what 0DTE means “0 Days Until Expiration”. These are very volatile options that can rise or fall quickly due to the short expiration date and how it affects pricing. This is what makes them an attractive asset to trade.
What Assets to Trade 0DTE Options On
Most people when trading 0DTE options trade the SPX Index since it is cash settled at the end of the day meaning you don’t have to take ownership of shares. It also has very high volume and liquidity to prevent you from being stuck in a trade and unable to get out. SPX has another advantage which is having 0DTE options you can trade daily, unlike many other indexes and stocks where you can only trade these options once a week or month when they expire.
Types Of 0DTE Strategies
There are many strategies that can be used when you are trading these types of options some with less risk and some with more risk. Below are the three most commonly used when trading 0DTE Options on SPX.
Credit Spreads
One of the simpler trades to make is selling credit spreads far outside the expected daily move of SPX. The implied move for the day which will be explained more in-depth in the section below. A credit spread is simply purchasing one option and selling one option at the same expiration but at different strike prices. These trades can have high win rates but also larger losses so risk management is important.
For example, selling one put option on SPX with a strike price of 3800 and buying another put option with a strike price of 3795 would be a credit spread.
Iron Condors
Iron Condors are trades you can use when you are not trying to trade a specific direction of the price. You can use these types of trades when using 0DTE options to minimize risk if you are unsure of the direction SPX will move.
Setting up an Iron Condor requires you to place four trades, 2 put options that are long and short. Then another 2 call options that are long and short
Butterflies
Butterfly trades have low win rates but also have very low risk. Many of these trades can have 3x return rates to the amount of capital you are risk per trade but can incur many losses in a row before having a winning trade. Butterflies can also be long or short as well.
To set up a long butterfly trade you will need to buy one call at a lower strike price and then sell two calls above it. Then buy another call with an even higher strike price. This requires four trades to set up.
What Option Contracts To Choose
To choose strike prices for any of the strategies above you are going to want to look at the expected percentage SPX is expected to move for the day. This can be found on many trading platforms but on Thinkorswim it is shown in the image below.
By looking at this number you can see the implied move traders are expecting SPX to move in either direction. You can see in the image that the price is expected to move 28 points either up or down for the day. This is just the implied move traders expect it to move based on the price of the options. This is important when using any of the strategies listed above because you can choose options outside this range to give you a higher chance of a winning trade.
Another column to look at is the probability of expiring out of the money. This column will tell you the odds of the assets price reaching the strike price of the specified option contract. This is based on volatility and is useful to look at as well because it has an effect on the pricing of the options and can help you make a better decision on which strike prices to choose.
Risks and Managing Trades
Managing 0DTE trades is one of the most important things you need to do to make this strategy work. Since prices of the options can rise or fall very quickly, you need to have a plan in place before trading.
Rolling Trades
One of the ways traders manage a losing trade is to roll the contracts into the next day or week. Doing this gives you more time for the trade to work and will decrease the volatility as the expiration date of the option will be farther away but you are putting yourself at risk by holding overnight.
Dynamic Stop Loss
A dynamic stop loss is not at a fixed level it can be based on support levels or an indication that the trade is not going as expected. By spotting market changes early you can get out of your trade before the loss gets too big. A dynamic stop loss is different in contrast to a fixed stop loss which is at a specific percentage each trade.
Scaling Out of Your Trades
Scaling in and out of your trades is also important because doing this is going to minimize your risk immensely and is particularly useful when trading multiple contracts.
Conclusion
If you decide to trade 0DTE options you should have a good understanding of how options work first because not understanding what you are doing can lead to large losses to your account due to the fast movements in the pricing of these types of options contracts since they expire at the end of the day.
