To The Moon

Today’s main consumers of financial products are retail traders, many of whom learnt basic option math watching YouTube videos and on Reddit, maybe in college. These same consumers also honed their amateur skills in day-trading during the COVID era. 

These traders know how to use network effects, i.e. social media, to influence the power of the masses, which, as we know can impact markets in unpredictable way, just as locust swarms do to fields.

0DTE Options trading volume  has risen sharply

Index options on the S&P 500 now expire on every day of the week. So if you are a day trader of the S&P 500 or its ETF cousin the SPY, you can literally wake up in the morning and day trade, with immense leverage, an option that will expire at the end of the day.

This strategy has no overnight margin risk since the options are “self-liquidating”. As long as you have enough capital to buy or sell one of these options, you can. What has been stunning is that over 40% of all S&P-related options are now same day expiry, or “zero-day-to-expiry” options, shorthanded as “0DTE”. Ten years ago this number was about 5-10%.

No risk, no premium?

After checking with ChatGPT whether 0DTE options are dangerous, and here is what it came back with (which is not bad at all):

“Yes, 0DTE (Zero-Day to Expiration) options can be very risky and dangerous. These are options contracts that expire on the same day they are purchased.

The danger with 0DTE options is that the price of the underlying asset can move quickly and unpredictably, especially on the day of expiration. This can result insignificant gains or losses, depending on the direction of the price movement.

Additionally, 0DTE options have a very short time frame, which can make it difficult to predict the direction of the underlying asset's price movement with any degreeof certainty. This can lead to increased volatility and higher risks.

Furthermore, the bid-ask spread on 0DTE options tends to be much wider than for longer-term options, which can result in higher transaction costs and reduced liquidity.

Therefore, it is generally not recommended for novice traders to invest in 0DTE options unless they have a high risk tolerance and experience with options trading.”

Greed overrules Fear for now

What Is The 0DTE Options Strategy?

Every options contract expires on a specific date. DTE stands for “days to expiration” and represents the time remaining until an options contract expires. Depending on the underlying asset, these expirations may be quarterly, monthly, weekly, or even multiple times per week.

A 0DTE strategy opens and closes a position on the contract's expiration day. Typically, traders sell to open contract(s) in the morning and hope to repurchase them for a lower price before the close.

Why? Because on expiration day, nearly all of the option’s time value has decayed. What little extrinsic value remains quickly disappears throughout the day and only the intrinsic value remains.

If the contract remains out-of-the-money, or volatility declines, the trader may have an opportunity to exit the trade for a quick profit.

Many traders enjoy this strategy because of the “sleep at night” factor. With no positions held overnight, they are not subject to the risk that after-hours price moves will affect their returns.

From 03:50-03:59 on Fri, 14 April

From 03:30 to auto close on Mon, 17 April

⚠️ Trading Tips: Traders typically use highly liquid underlyings such as SPY, QQQ, or other tickers with high daily options volume when trading these short duration strategies. Check for volume and go with the option flow. Use only capital that you can lose all or avoid it altogether!

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