The interest in 0DTE – zero days to expiration – options trading has exploded during the last few years. Many retail traders are attracted to the opportunity to make profits every day. 

However, the short time frame also comes with huge risks, especially if the market moves fast against you. A position can go from being profitable to being at a big loss in seconds. 

Risk management is therefore crucial in 0DTE trading. For many traders that means setting a stop-loss to ensure they get out if the loss is bigger than what they are willing to accept.

But what is the best way to set a stop-loss in 0DTE trading on options? 

Traders follow different ways. 

Let’s explore two of the main choices in this article – and consider the pros and cons. 

For simplicity, we will only consider stop-losses on 0DTE credit spreads on the very liquid SPX option. However, we will NOT consider which level the stop-loss should be placed on, as that will vary with the strategies traders follow. 

Two main choices for setting a stop-loss

Within these constraints, there are two main choices the trader needs to make:

– What type of stop-loss should I set? The main alternatives are a stop limit order, a stop market order, a combination of both, or a mental stop-loss.

– What should I set the stop-loss on? The full spread – both the short and the long? Or only on the shorts?

So let’s dig into the two choices.

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Choice number 1: Type of stop-loss

The first choice is what type of stop-loss we want to have. In principle, we have four different alternatives to choose from:

Stop limit order

A stop limit order is set with two prices:

– The stop price, where the stop-loss order is triggered

– The limit price, which is the maximum price the position can be closed at

Here is an example of a stop limit order from the Thinkorswim platform. The stop-loss is set on a short 5515 Call on SPX. 

The stop price is set at 1.5 dollars. When the price – currently at 0.975 – hits 1.5, the stop-loss order will trigger. 

The limit price is 1.8. The order can only be closed at 1.8 dollars or better. 

Pros of using a stop limit order

– The main benefit is that you have set a maximum price that you are willing to pay to get out of the position. You do not risk being closed out at a lower price than your limit price. This gives you a sense of control of the price you are closed out at.

Cons of using a stop limit order

– The main disadvantage is that you are not guaranteed that the trade will be closed. The market can sometimes move very quickly and may skip your limit price entirely. If the market then continues to move against you, the loss may grow very quickly without your trade being closed.

Stop market order

A stop market order executes at the moment the stop price is hit. It will execute at the best market price at that moment. In essence, the stop market order becomes a market order when the stop price is hit.

Pros of using a stop market order

– The biggest advantage of using a stop market order is that you are guaranteed to get out of the trade. The order WILL execute at whatever is the best market price at that moment. 

Cons of using a stop market order

– The main disadvantage is that you sometimes risk having a very bad fill, especially when the market makes a sudden large move.  In these situations the market liquidity can dry up within milliseconds and the spreads become extremely wide. 

Combination of stop limit and stop market order

Some traders, including myself, combine a stop limit and a stop market order by using the OCO (One cancels the other) functionality. 

In this alternative, you first set a stop limit order – and then a stop market order further out of the money. Using OCO, whichever order triggers first will cancel the other.

Pros of combining stop limit and stop market

– You can benefit from the advantages of both stop-loss types. Hopefully, it is the stop limit order that triggers. However, if it is skipped in a sudden market move, you still have the stop market order as a last defense. In this way, you are guaranteed to get out.

Cons of combining stop limit and stop market

– In rare cases, you can risk that both orders are executed simultaneously, turning your short position into a long one.

– The combination is also more time-consuming to set up and adjust. 

Mental stop-loss

Some traders do not want to take the risks with the automatic stop-loss order and instead decide to close the trades manually if they go against them. 

Often they set an alert on their broker platform to be notified when the price reaches a certain level. They then monitor the trade carefully and close it manually when it reaches their mental stop-loss level.

Pros of using a mental stop-loss

– You have full control of when to close the trade – and are not a victim of the disadvantages of the automatic stop-losses. 

– You can assess the market movement, including support and resistance zones, and make a qualified decision exactly when to close.

Cons of using a mental stop-loss

– The markets can move much faster than the human brain can think. A sudden big move in the market can cause a huge loss while you are reflecting on what to do.

– Most traders will find it much harder to be disciplined when using a mental stop-loss. Even though you may have set a mental stop price ahead, it will be very tempting to revisit that decision, telling yourself that the market for sure will turn in your favor. 

– You trust yourself too much.

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Choice number 2: Stop-loss on the spreads or the shorts

The second choice is whether you should put a stop-loss on the spread (both the short and the long) or only on the short. 

Again, there are pros and cons with both alternatives.

Stop-loss on the spread

With a stop-loss on the spread, you will close both the short and the long at the same time. 

Pros of using stop-loss on the spread

– It is easier to manage.  You sell the spread for a certain price, and you close it for a certain price. Once the stop-loss hits, you are out of the trade. And you know exactly how much you lost right away.

Cons of using stop-loss on the spread

– Stops on spreads tend to have higher slippages, at least in my experience. 

– With sudden moves in the market, liquidity may dry up, and spreads suddenly become insanely wide. In these situations, the stop-losses on a spread rather than on the shorts only have a higher risk of a bad fill.

Stop-loss on the shorts

With a stop-loss on the short only, you will need to close the long manually afterward or let it expire.

Pros of using stop-loss on the short only

– In my experience, it generally has a much lower slippage than a stop-loss on the spread.

– The remaining long can sometimes give you a nice additional profit if the market continues to move “against” you after the short was stopped out.

Cons of using stop-loss on the short only

– It is harder to manage. You have to adjust for the estimated value of the long when you set the initial stop-loss, and then keep re-adjusting as the value of the long diminishes during the day. You also have to monitor the trades more carefully to be ready to close the long whenever the stop-loss on the short hits.

– If the market suddenly changes direction after the stop-loss on your short hits, you may lose more than expected if you are not super-quick in closing your long.

So what is the best way to set a stop-loss?

There are good arguments for all alternatives – and also reasons why they may not be the smartest choice. In the end, it is up to you.

I can, of course, tell you what I do personally. But IT IS NOT a recommendation, just purely my choice.

– I set my stop-loss as a combination of a stop limit and a stop market order. Typically, I set a spread of 30 between the stop and the limit price, and then the stop market order a further 20 beyond the limit price. 

– I now set the stop on the short only. Previously I set it on the spread. I have found that it reduces slippage significantly. And in some cases, I can profit from the market moving “against me”. 

However, there are good arguments for all alternatives. And it also depends on your trading style and risk tolerance. My main intention with this article has been to present the pros and cons of all the alternatives. 

What do other 0DTE options traders do?

From discussions in options trading communities I am part of, I know that traders think very differently about what is the best way to set stop-losses in 0DTE options trading. 

So I asked two experienced retail trades what they do and why:

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I have been an options trader since 2006 when I traded part-time while I worked as an architect for commercial projects. The real fun began in 2017 when I retired to trade full-time using primarily 0 DTE strategies. I rely heavily on backtesting and analyzing my strategies in order to continually improve my trading.

How do you set your stop-losses for 0DTE credit spreads?

I use market stops for 0DTE trades. I find them more reliable than either stop limit orders which can blow through the stop without filling if the price exceeds the limit, or mental stops which are the slowest method because it’s impossible to act quickly enough for 0 DTE trades.

Before August 2023, I used stop limit orders because there were spikes in option prices in SPX. These spikes were caused by market makers jacking up the prices to control order flow if there was a liquidity crunch on certain strikes. Still, since August 2023, CBOE has implemented changes to improve liquidity to the market makers, eliminating these spikes. I’ve used market stops with no issues since that time. There can be slippage associated with market stops, but this minor annoyance doesn’t affect the overall performance. I’ve never had a market stop not fill. (So far!)

And what is your choice between stops on the spread or the shorts? Why did you choose this approach?

Currently, I am using a stop on the short leg rather than a stop on the spread for my manual trading.

Before February 2024, I would always use a stop on the spread, and convert to a stop on the short leg when the value of the long option was worth less than $.05 because that stop would be untradeable with a worthless leg. This is easier to manage than putting stops on the short leg, but as of February, ETrade no longer allowed stops on spreads and I was forced to trade with a stop on the short leg.

I have developed rules for setting the stop to account for the value of the long leg so that when I am stopped out, I can still keep my losses to my target 1x net loss. With this technique, I take 2x the total initial credit on the trade and add 1.5x the initial credit of the long leg. This allows for some decay to occur on the long leg, as the further OTM options decay faster than the closer to the money options. Later in the day, I will adjust the stop to 2x the total initial credit to remove the value of the long leg, which by then has decayed further.

After having traded this way for about 6 months, I find that there are advantages to this method. Often in a fast-moving market, the value of the long option will increase quickly and I can hold off closing it until I think the price is at a maximum. This way I can reduce the losses on those trades that get stopped out. Of course, sometimes the price turns around and I don’t get the premium that I had planned for, but I can price improve often enough that it’s beneficial. I also trade using an automated system, and for that I use stops on the spreads and just let the program manage those trades.

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I’ve been trading options since 2017, and 0 DTE since 2020. 0 DTE strategies are the core of my portfolio.

How do you set your stop-losses for 0DTE credit spreads?

It really depends on the strategy you are doing, how much youcan watch the market, and understand the pros and cons of each type. For the main strategy in my portfolio, I use a stop market on the short option only. I choose the short option because the long option can become worthless in the afternoon, which can cause a stop on the spread to not fill (no one willing to buy the long leg you’re trying to sell).

And what is your choice between stops on the spread or the shorts? Why did you choose this approach?

I used to use a stop limit order, but back in August of 2023 the CBOE (Chicago Board Options Exchanges) rolled out Enhanced Drill Through Protection which helps avoid rogue fills (when the option price does not move in tandem with the underlying). Before August it would be nearly monthly that there’d be a rogue fill that some traders had to deal with. Since August ’23 I haven’t had any rogue fill experiences so I moved from limit to stop market in the spring of ’24.