How to Trade 0DTE Options

Once you’ve had a little experience trading options, you might become curious about the opportunities of trading options intraday. In 2022, the Chicago Board of Options Exchange (Cboe) announced that it would issue weekly options with expiration days on each day of the week.1 This announcement applied to options on the S&P 500 Index (SPX), but more symbols have continued to be added as trader interest in zero days to expiration (0DTE) options has grown.

While it might sound like the kind of activity only an energy-drink company would sponsor, the reality is that 0DTE options are best suited for experienced options traders that know how to manage the massive volatility that is often associated with this type of trading. A trader who wants to pursue this strategy will also need to research the right online broker or trading platform to fit their needs. We’ve compiled the basics every 0DTE enthusiast should know, and have structured this guide for trading options to answer the questions most novice option traders have.

How to Trade 0DTE Options

Traders who want to participate in 0DTE option trading should recognize that they will be making frequent transactions. Consequently, they would benefit from a broker that has low commission costs for options, great option analysis tools, fast execution speeds, and strong education resources.

Opening an account will require that you share personal information about your identification, financial status, and trading experience. Once you’re prepared to share the necessary information, you can research the brokers with which you can open an account. Investopedia’s broker reviews can help with that. After you have selected a broker to use, and filled out the account application (this is usually done online and is fairly quick), then you can request options trading approval.

Step 1: Understand the Risks

Before trading 0DTE options, it’s essential to understand the risks involved. 0DTE options are highly speculative and can lose their value rapidly as expiration approaches. Additionally, they are subject to time decay, meaning their value decreases as time passes. As a result, trading 0DTE options requires careful risk management and should only be attempted by experienced traders with a high tolerance for risk.

Step 2: Choose the Right Underlying Asset

When trading 0DTE options, it’s crucial to choose the right underlying asset. Look for stocks or ETFs that are highly liquid and have a history of volatility. Liquid assets have tight bid-ask spreads, which can help reduce trading costs and improve execution. Additionally, volatile assets offer the potential for larger price movements, increasing the profit potential of 0DTE options trades.

Step 3: Conduct Technical Analysis

Before placing any trades, conduct thorough technical analysis to identify potential entry and exit points. Look for patterns, trends, and support and resistance levels on price charts to help inform your trading decisions. Additionally, consider using technical indicators such as moving averages, RSI, MACD, and Bollinger Bands to confirm your analysis and identify potential trade setups.

Step 4: Choose the Right Options Strategy

There are several different options strategies you can use when trading 0DTE options, including:

  • Day Trading: Buying and selling options contracts within the same trading day to capitalize on short-term price movements.
  • Scalping: Taking advantage of small price movements by quickly entering and exiting options trades for small profits.
  • Straddle or Strangle: Buying both a call option and a put option with the same strike price and expiration date to profit from significant price movements in either direction.
    Choose the options strategy that best aligns with your trading style, risk tolerance, and market outlook.

Step 5: Monitor the Market

Once you’ve entered a trade, monitor the market closely to stay informed about price movements and changes in volatility. Set price alerts and notifications to alert you to potential trade opportunities or adverse developments. Additionally, keep an eye on any news or events that may impact the underlying asset and adjust your trading strategy accordingly.

Step 6: Practice Risk Management

Managing risk is crucial when trading 0DTE options. Only risk capital that you can afford to lose, and never trade with money you need for essential expenses. Consider using stop-loss orders to limit potential losses and take profits quickly when trades move in your favor. Additionally, diversify your trades and avoid putting all your capital into a single trade.

Know the Risks Associated With 0DTE Options

Expiration-day trading carries an elevated risk of losing everything a trader spent in buying the option contract, simply because the option will expire as soon as the trading session is over. For example, if a trader buys an at-the-money (ATM) call option two hours before the close, and the underlying security falls strongly with an hour left to go in the session, there is very little chance that it will rebound back to its former levels. The trader will then find their contract nearly worthless.

Another risk of trading 0DTE options applies exclusively to option sellers. This includes an increased risk of being assigned when a contract buyer exercises the option before the market closes. Such assignments are rare, but they can happen since American-style options can be exercised at any moment up until expiration.

The biggest area of risk for option buyers also happens to be the most prevalent area of opportunity for sellers: theta decay. Theta decay is a persistent, mathematical force in option pricing, and option traders have to know how they will manage it in order to be successful.

Theta Decay

Option prices are sensitive to the passage of time. The closer the day comes to expiration, the more the price of the option will decline, all other factors being equal. This loss of value that occurs over time is known as theta decay and is sometimes referred to as time decay. The amount of theta decay an option has will not only increase leading up to the day of expiration, but will also increase throughout the hours of the final day before expiration.

During the final hours before expiration, even though theta decay continues to increase, the relative influence from the underlying security’s price action begins to increase. Even a normal-sized move in the final hours before expiration can have a large impact on the change of the price–potentially bigger than the decline of time value. That’s what makes 0DTE trading so attractive to buyers.

However, most buyers simply overestimate the chances of a big move in the underlying occurring within a short window of time on expiration day. That’s why option sellers are so frequently able to generate winning trades.

What Securities Offer 0DTE Options?

All options can be traded as 0DTE options, but only a few securities offer options which expire every day. By the end of 2022, Cboe offered expiring contracts on every trading day for the following securities:

  • Nasdaq 100 Index (NDX)
  • S&P 500 Index (SPX)
  • Mini-SPX Index (XSP)
  • SPDR S&P 500 ETF Trust (SPY)
  • Invesco Nasdaq 100 Trust (QQQ)

The growing popularity of these instruments may lead to more securities having daily-expiring options made available.

Factors to Consider When Opening an Options Trading Account

Customer service: This is critical for newer traders who need someone to call or chat with when they don’t understand what they see in their account. As a beginning option trader, you’ll want a broker that can be rapidly accessible and able to give quick answers on things like balance changes, margin requirements, margin call notices, or other unusual notifications. A broker representative should be available to clarify what is happening in your account regarding option trades especially on topics of expiration, assignment, and closing out spread trades.

Fees and commissions: Some brokers charge commissions on option trades, even if they don’t charge commissions on trades of stock shares. The costs of commissions and fees can vary significantly as certain brokers prefer to remove some or all commissions from the customer transaction. For those that do charge, $0.65 per contract is a typical price.

Account minimums: For stock and option trading, opening an account with a minimum deposit of several thousand dollars has become a thing of the past. Most brokers will allow customers to open an account without funding it right away.

Research and trading tools: Our comprehensive reviews show that most brokers supply fundamental, technical, and even proprietary research for traders. Online web-based brokers tend to offer a more sophisticated toolset for trading than mobile-based apps used by some of the newer brokers such as Robinhood, Webull, or eToro. Sophisticated charting tasks are more productive on a broker’s platform that runs on a PC or Mac platform. The same is true for complex order types such as conditional or branching orders.

Educational content: Highly informative articles, videos, online classes, interactive quizzes, and more are common nowadays for many brokers. The most popular broker platforms are often featured by option traders who create content on social media platforms as well. You shouldn’t have to struggle finding educational content for your trading platform, so if you do, take that as a warning flag.

Demo account: Many of the brokers reviewed include demo accounts. These allow a trader to make simulated trades based on the same platform interface they will use to make trades. This can be very helpful for traders just getting started trading options. But not all brokers provide this tool, so beginner-level traders may want to check out the Investopedia simulator if they have no tools available from their broker.

Conclusion

Trading 0DTE options can be an exciting and potentially lucrative endeavor for experienced traders willing to take on the associated risks. By understanding the risks, choosing the right underlying asset, conducting technical analysis, choosing the right options strategy, monitoring the market, and practicing risk management, you can increase your chances of success when trading 0DTE options.

FAQs

  1. What are 0DTE options?
    • 0DTE options, or zero days to expiration options, are options contracts that expire on the same day they are traded. They are highly speculative and subject to rapid price changes as expiration approaches.
  2. What is time decay?
    • Time decay is the rate at which the value of an options contract decreases as time passes. 0DTE options are particularly susceptible to time decay, as they have no time value remaining on expiration day.
  3. Can beginners trade 0DTE options?
    • Trading 0DTE options can be highly speculative and risky, making it unsuitable for beginners. It’s essential to have a solid understanding of options trading, technical analysis, and risk management before attempting to trade 0DTE options.
  4. What are some tips for trading 0DTE options?
    • Some tips for trading 0DTE options include choosing highly liquid underlying assets, conducting thorough technical analysis, using stop-loss orders to limit losses, and practicing risk management.
  5. Are there alternatives to trading 0DTE options?
    • Yes, there are many alternatives to trading 0DTE options, including longer-term options trading, stock trading, futures trading, forex trading, and more. It’s essential to explore different trading strategies and find the one that best suits your financial goals and risk tolerance.

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