0DTE options trading
0DTE options trading has become increasingly popular.
0DTE means zero days to expiration (DTE = Days To Expiration). In other words, this is trading with options that will expire at the end of the same day you trade them.
Pros and cons of 0DTE options trading
One of the main attractions of 0DTE options trading is the potential for quick profits. Since these options are close to expiration, the prices can move rapidly with market changes - giving opportunities for scalpers. But also theta decay is fast, which is a benefit to options sellers. As the clock ticks down to expiration, the value of options can diminish quickly, potentially allowing sellers to pocket the premium if the market stays within their expected range.
However, the fast-paced nature of 0DTE trading also comes with significant risks. If the market moves sharply against your position, there is very little time to react or adjust your strategy. This can lead to substantial losses, especially for those who are not experienced in managing these quick trades. The potential for significant market swings in a single trading day means that even a small move in the underlying asset can lead to big changes in the option's value.
One crucial aspect of 0DTE options trading that traders must be aware of is gamma risk.
Gamma measures the rate of change of an option's delta relative to the price of the underlying asset. With the short time to expiration, gamma can expand exponentially in 0DTE trading. Because of this even small movements in the underlying can cause significant and rapid changes in the price of the option.
Strategies for 0DTE options trading
There are an unlimited number of possible 0DTE strategies. They depend on whether you want to trade directionally or market-neutral, how much risk you are willing to take, the size of your account, and much more.
For option sellers, two common approaches are selling iron condors or credit spreads.
Selling iron condors is market neutral - and betting that the market will stay within a certain range until the expiration fo the options. One such strategy is the 0DTE Breakeven Iron Condor.
Selling credit spreads are directional trades - betting that the market will move up (selling put credit spreads) or down (selling call credit spreads) during the day.
These are the main approaches. But you can design your strategy however you want.
One advice: Always be aware of the risks and what is the worst thing that can happen to your trades. And: TRADE SMALL!
Why you should use a stop-loss
We strongly recommend that you use a stop-loss in all 0DTE trading. The market can move much faster than you can think, and a profitable position can turn into a big loss in a matter of seconds. Without a stop-loss, you are putting yourself at great risk.
But setting a stop-loss is not straightforward either. In this article, we are explaining different types of stop-loss.