All about 0-DTES

Those 0-DTES. Some love them, some hate them. Some make a killing from them, others destroy accounts with them. With the somewhat recent addition of every day 0-DTES to SPY and QQQ and the long standing access to 0-DTES on the SPX, its begs the questions: Are they safe? Who are they for? How can I use them to my advantage?

And those are the questions that I will attempt to answer. Zero-days-to-expiry options are the bulk of my day trading strategy. I had some 0-DTE strategies leading into the new year, but when the market makers, in their infinite wisdom, decided to make every day a 0-DTE day, I actually developed a new strategy (the All or Nothing Strategy) that I will sometimes employ when I am just not feeling it. I will outline the various strategies one can use for 0-DTES and the requirements for those strategies, but first let us talk a little bit about 0 DTES.

What is a 0 DTE?

A 0-DTE or 0 days to expiry, option is an option contract that will expire the same day. Buying or selling a 0-DTE is considered highly speculative and highly risky. Why? Well, because with a 0-DTE, Theta (otherwise known as time-decay) is not on your side.

On any option, on any given day, on any given expiry, the general probability that the option will expire worthless is around 80%. This is what makes selling options very enticing to option sellers and why option buyers know that they have to treat their options like hand grenades with the pin out. Get in and GTFO. Theta will slowly eat away at your position the longer you hold and there comes a point in time that, while your strike may be hit, you may not have the profits you initially theorized (thanks to your friend, Theta).

This is augmented even more with 0-DTES because Theta is so extreme and the decay is wearing on your position with each passing second. So that begs for an answer to the first question, Are 0-DTES safe?

Are 0-DTES Safe

This is a highly subjective question and the answer I will give you is highly subjective. But I will outline the reasons for my thoughts on this.

Are 0-DTES Safe? My answer is, yes, they are the safest option but only for Day Traders. Let me elaborate on this now though, because I know people are going to disagree with me.
The general consensus with avoiding 0-DTES is “you need to give yourself time”. But this is where my view tends to diverge. Zero-DTES are no more dangerous or safer than any other option. All option buying is highly speculative. Zero-DTES are not inherently more or less safe than buying an option expiring on Friday or in a month.

The notion of “giving yourself time” or “giving your position time” starts blurring the lines between having an analysis and thesis and just purely speculating / gambling. If you go into a 5 day option contract, expected a target price of say, 361 on QQQ on the day, and that target price doesn’t realize, you are wrong. Your analysis was wrong and the position you took was wrong. That’s fine. Most responsible traders would stop out at their pre-defined stop out point. But if “you have time” on your option contract and not great emotional control, you may find yourself start to spiral. And when you spiral, you are going to hold that option contract. And chances are if your thesis on the day was incorrect, your thesis is incorrect period, so you are holding a position that is likely going to fall into that 80% probability zone. Then the losses compound over the day, theta wrecks havoc on your position and before you know it a $100 stop out is now a complete loss on your option.

With 0-DTES you don’t have that luxury. When you are wrong, you need to GTFO ASAP. I have personally found 0-DTES remove my ability to “gamble” and overly “speculate” long term when I day trade. I am either right, or I am wrong. If I am right, great. If I am wrong, I don’t even have the option to be consider “well, maybe I just had the wrong timing, let’s hold and see what happens”. This is really bad thinking and this has lead to tons of problems for me and many others I have spoken to.

That said, many times I have been wrong on day but right in general, my timing was just off. But that is not the trade I meant to take. When I enter into a trade with the intention of only day trading it, if that TP is not correct on the day, it doesn’t matter if we hit it 3 or 4 days down the road, I was just wrong. And for every time this was the case, 50% of the time it was not the case, where had I held, my loss would have spiralled into massive, sustained losses. So you see, 0-DTES can be a safer alternative for day traders by forcing them to accept when they are wrong.

Now, of course, this does not apply to swing traders. If you are swing trading an option, then this is not applicable. Obviously you will not be using a 0-DTE.

Who are they for?

Well, this was already answered but day traders. They are for day traders. There really is no one else who is going to benefit from a 0-DTE contract but a day trader. If you do not fit in that category, then 0-DTES are not even an option!

There is a caveat to this. None option traders can also benefit from 0-DTES in their ability to predict the implied range for the next day. We will talk about this later.

How can I use them to my Advantage?

This is a great question and the truth is, both non-option traders and option traders can use 0-DTES to their advantage. How? Well, the main advantage to having every day 0-DTES is you can see what the Market Makers are thinking and expecting before the day even starts.

Knowing the Implied Range

Having every day 0-DTES permits traders to know what type of move the market is expecting the next day. To do this, traders can use the implied range from options calculation method and perform it either by hand, via an online calculator or via an indicator (such as one I did here). This will give traders insight into whether the market is expecting a big move the next day, or a more tame, choppy move.


Trading them

The most obvious way to benefit from them, aside from having an idea of the range for the next day, is to trade them. So let’s get into some strategies I and others have used successfully. I will also make mention of strategies that I have no had great success with. Let's get into it:

Strategy #1: Option Seller: Range Straddle

About:

On a very basic day, with no big catalysts, some traders may opt for a range straddle and sell 0-DTES at either end of the range. Which range is that? The implied range from the options themselves.

They will sell at the strike at the top of the range and at the strike to the bottom of the range. Because 80% of options expiry worthless, odds are in your favour here.

Who is it for?

This strategy requires high margin requirements and is not suitable for novice or small account users, or those operating on cash accounts. It is also not ideal for novice option traders.

How to do it:

To do the range straddle, its pretty basic. You make sure you are doing it on a day that there are no major catalysts. Once you have verified that there are no scheduled new releases for the day, you then proceed to calculate the implied move to obtain your range. Then, you simply sell calls at the top and puts at the bottom. If you wait for movement in your favour to sell the position, this can work to your advantage (e.g. if the stock is going up, you can sell calls, with the anticipation that it will not surpass the range and/or get smacked down).

This strategy works well enough. Of course, its not risk free, you run the risk of the market getting excited and just shooting past or below the implied range, but that is why you make best efforts to control for major, fundamental catalysts or news releases.

Because it tends to be a more successful strategy, the gains are not major. This is a stable way to make money that is safer than purely speculating on a move. However, there are times when this backfires and your losses can really pile with this type of strategy, so you really need to be careful and set alerts and be prepared to have to defend your position. Like I said, this is not for novice traders and only a strategy I have done a hand-full of times.

Variations of this Strategy:

There are variations, such as those who do Iron Condors on 0 DTES. There are also credit spreads on 0 DTES; however, credit spreads require a bias one way or the other, you are just hedging your downside risk. As I have not used a credit spread on a 0 DTE, I can’t really speak to this on a persona level.

The Speculative Straddle

About:

The speculative straddle is when you buy two, ITM, 0 DTE contracts with similar strike price, the call and put version, in the anticipation of a major move in 'a direction'.

Who is it for?

This strategy can be applied by anyone, both novice and experienced traders. There are no major margin requirements for this strategy and you can do it on a cash account.

How to do it:

To do this strategy, you need to ensure that there is a major catalyst that is almost guaranteed to move the market. One of your positions are going to go worthless, the other is going to, ideally, make you money and also outpace the loss of our opposing position.

In general, you will buy ITM (in the money) 0-DTE calls and a similar strike ITM puts and wait for the move to be realized in one direction or the other.

Thoughts on this Strategy:

I do not advise ever doing this strategy with the indices anymore. There was a time and a day where this worked fantastic for SPY and QQQ and I used to do them all the time. That time has long since passed. With major catalysts releases now specifically seeming to target people applying this strategy, this is a really terrible decision under the current market climate. I have used this strategy a total of probably 4 times this year on the indices, all but once I lost money in both directions because the market did not move at all and just whipsawed. I no longer personally use it, but it is still a viable strategy on company tickers for earnings releases and other news releases, if they fall on a Friday. However, on SPY or QQQ, its just not worth it.

The All or Nothing Strategy

This is the one I use the most!

About
The “All or Nothing Strategy” is a strategy I developed to complement my main strategy. What it is, is I enact my strategy to come up wit the most likely price target on the day. Then, I buy about $500 to $1,000 worth of 0 DTES. I then just let it do what its going to do. I either profit fully, or lose it all.

Who is it for:

This strategy is really only for traders who have fully back-tested their strategy and their success rate (I have posted some “how-to” for back-testing that I will link below). If you do not have a viable statistic for your success and failure rate, this strategy is not for you.

For me, my personal success rate on my strategies is around 88%. Meaning, I am able to profit around 88% of the time. So we will need to do a bit of math here to see if this strategy is viable. And I have created a formula/math problem for you to see whether this strategy is viable. Here is what you need:

• Your raw success rate over the past 1 month.
  
• Your average percentage return, on a 0 DTE, over the pats 1 month.
  

First, we calculate the odds of having a successful trade vs an unsuccessful trade in the course of 1 month. So for September, my success rate was around 86% over the course of 20 trading days. So we can either take the number of successful trades and divide it by the total number of trades, or I can take 0.85 (rounding down my success) x 20 trading days. Here is how it works out

0.85 (successful trades) x 20 (trading days in the month) = 17 successful trades in 20.

My average, 0 DTE return over the course of September was 68%. This is done by simply tallying up y our percentage wins over the course of 1 month and dividing by the number of wins in total. So, if you had 5 wins at 80%, 20%, 10%, 30%, 90%, your average win would be 46%.

So now we need to forecast the profits of our future wins vs the anticipated loss. For this, we need to decide how much of a position we are willing to take (and lose). Let’s say, we are willing to take/lose $500. So, in the next 20 days, we can anticipate 17 wins (I usually round down, so let’s say 15 wins) and 5 losses. Our potential profit is:

$500 x .46 = $230 profit per trade

$230 profit per trade x 15 successful trades = $3,450

Now, we have to calculate our potential losses. We do this like this:

$500 risked x 5 losing trades = $2,500

Now, let’s calculate our forecasted net P&L:

$3,450 - $2,500 = $950

Now this isn’t going to be exact, remember we a) rounded down and b) are only using our average. But, this will give you a realistic figure to see whether this strategy is viable for you. By ensuring you are rounding down and assuming the worst, if it still works out to be net positive, you are in business!

How to do it:

So you did the calculation and think its right for you? Well, this is how I do it.
I identify my price target, either the day before or at open (my strategy requires me to wait till open). I then will buy a 0 DTE at the current stock price strike (ITM). This helps with your overall decay. I then set an alert for the TP and let it do its thing. I will usually set an auto TP on half the position at the TP and I will trail the rest once the alert is triggered.

Thoughts on this strategy:

I developed this strategy for one reason and one reason alone. Day trading is highly emotional and anxiety provoking. This strategy has greatly reduced that anxiety. I either lose it all or I am up. You have come to terms with the fact that you could potentially lose the total position size before you go into the trade. So when I go into the trade, I am already at peace knowing that the most I am going to lose is, say, $1,000.

I am also at peace with the fact that I don't need to watch my position every waking second. I can just set it, forget it and stop caring. Let my alert get triggered and then I get out. I don't need to obsess over the whipsaw or erratic PA.

You can technically do this with further dated option contracts; however, the price of entry is much more and you are generally risking more capital than simply using a 0-DTE.

This strategy has been the most emotionally liberating strategy I have discovered in a long time. Seriously.

Concluding remarks

And that is all about 0-DTES and the strategies you can use using 0-DTES. Hopefully you learned something!
As always, leave your comments and questions below.
Safe trades everyone and enjoy your weekend!