0DTE Options Benefits, Myths & Risks

In the last two years, zero-days-to-expiry (0DTE) options have exploded in popularity, capturing the attention of the entire options trading community, both retail and institutional. Thankfully, I wouldn’t go so far as to say it’s at “meme stock” level, but if you’re in the options trading space, it’s had a similar level of excitement for a while now as 0DTE volumes continue to grow.

These options contracts, which expire the same day they are traded, have quickly become a cornerstone for many traders, myself included. And when you add liquid tickers like SPX (S&P 500 Index) options to the mix, you’ve got an exciting momentum train for traders to jump on that we haven’t seen in over a decade.

Still, despite all these opportunities, many traders remain hesitant to try 0DTE strategies because they may not understand how 0DTE contracts work, how they can trade them safely, and/or feel like there are “hidden” risks that make them avoidable. 

I want to help cover as many bases as possible in this article by exploring the rise of 0DTE options, the benefits they offer (particularly when trading with SPX), some common misconceptions and myths, and presenting new data on 0DTE volume trends this year.

0DTE: Niche to Mainstream

The concept of 0DTE options trading wasn’t always mainstream, but technically speaking, 0DTE contracts have been around for a long time already, just not in the traditional sense we think of now. In fact, if you’ve traded any option contract at all in your life, you have already traded a 0DTE contract.

“Wait, how can that be, Kirk?” Let me explain.

Initially, many traders like myself focused all their trading on longer-dated expirations to give themselves more time to adjust positions and manage risk. For example, I might sell an iron condor that is 45 days-to-expiration (DTE). This would give me plenty of time to let the position work out and manage it if needed.

Now, at some point, my 45 DTE iron condor would expire, and the last day it’s tradable would be its “0DTE” day, or expiration day. Remember, 0DTE contracts are simply options that expire in zero days (i.e., today). Therefore, if you think about it, all options contracts eventually become 0DTE contracts on their last trading day. It’s just that when people talk about 0DTE trading right now, they are talking about opening and closing positions on the same day the contracts expire.

So, we’ve all been secretly trading contracts that will become 0DTE, maybe not in the traditional sense yet, but the problem was that these 0DTE days were few and far between. Basically, if you wanted to trade 0DTE (again opening and closing a trade the same day it expires), you had to wait for a weekly or monthly expiration. As the options market saw increasing demand for contracts that expired every single day, we saw exchanges like CBOE roll out more daily option expirations to create 0DTE opportunities each day for traders.

SPX 0DTE Volume Trends

Since late 2022, when more 0DTE expirations were available on a rolling basis, we’ve seen an explosive increase in 0DTE activity and volume, particularly in SPX, the most popular and liquid options market for this. With the help from our friends at CBOE, we got the 2024 YTD data which shows that SPX 0DTE options now account for more than 47% of total SPX options volume, which shows just how big 0DTE has become.

The Benefits of Trading 0DTE Options

It’s clear that 0DTE has become a staple for options trading, but why? Well, here are a few of the benefits you can expect:

1. Quick Turnaround Without Overnight Risk: One of the most obvious benefits of 0DTE options is the quick turnaround. Since these contracts expire the same day they are traded, sometimes within hours of being opened, you can play the intraday price movements without being exposed to overnight risk. And as fast as the markets have been moving lately, this could be a considerable risk to which you might not want to expose yourself. Personally, I love that I can get back to a flat exposure each day for my 0DTE bots.

2. Accelerated Time Decay Exposure: My goal when trading 0DTE options, as I assume is the goal of many other traders, is to take advantage of the accelerated time decay that happens throughout the day. This is an expression of a normal trading cycle condensed into a single session. But it’s important to note, as we highlighted in our 0DTE Time Decay article, that theta decay happens mostly toward the end of the trading session.

3. High Volume and Liquidity: SPX 0DTE options trading volume and tight spreads truly highlight the vast ocean of liquidity that can be come in 0DTE trading. When you’re trading contracts that expire the same day, high liquidity levels that minimize slippage is critical. Plus, if I know that 0DTE contracts make up ~50% of SPX volume, I can feel confident that there’s always an opportunity to trade them on any given day, if I choose.

4. Targeted Market-Event Hedging: These days the news is filled with market-moving events, such as Federal Reserve announcements, Non-farm Payroll numbers, CPI releases, or major earnings events. Before 0DTE was a “thing” you’d have to pick the closest options contract to those events if you wanted to hedge your portfolio and protect from new events abruptly moving the market. With 0DTE contracts, I can hyper-target your hedging to the exact days of these events or announcements.

Why Are Traders Using SPX for 0DTE Trading?

In this article, we’ve focused mainly on SPX as it’s the most popular and liquid symbol for 0DTE traders. But popularity and liquidity aside, SPX offers some unique advantages that you won’t find in the equally popular sister symbol SPY. I think these added benefits, of which I think there are mainly three, are what have tipped the scales for 0DTE traders and why so many people, like me, gravitate towards SPX when trading 0DTE.

Cash Settlement

One of the key benefits, if not the most important one in my opinion, of trading SPX vs. SPY options is that SPX is cash-settled. This means the profits and losses are credited or debited directly to my account at expiration, eliminating the painful process and hassle of taking delivery of long/short shares and managing them.

European-style Contracts

This goes hand in hand with cash settlement above but it’s worth noting as it’s own section because SPX options are European-style, meaning they can only be exercised at expiration. This means I never have to worry about early assignments, as I do with SPY. When I trade SPX, I can feel confident I can let the position go all the way to and through expiration, and it will just net out to whatever profit/loss I have at expiration. There are no more lingering assignments to manage, which means I stay focused on my trading strategies.

Favorable Tax Treatment

For U.S. traders, SPX options also qualify for the popular 60/40 tax rule, which allows 60% of gains to be taxed as long-term capital gains and only 40% as short-term. And with an election coming up the benefits of having this favorable tax treatment can be a huge boost for your portfolio. If I traded the same strategies and setups all year in SPY instead of SPX for example, I’d have a much larger tax bill purely because of the symbol choice.

Traders may also consider XSP, an index option that enjoys many of the same benefits of SPX. XSP trades at 1/10th the value of SPX. However, XSP typically has much lower liquidity than both SPY and SPX.

Debunking Common Myths About 0DTE Options

Even with all these benefits we highlighted above, there are still some misconceptions that prevent new traders from exploring 0DTE trading. So, let’s address a few of the most common fears you might have thought about or heard about 0DTE contracts:

Myth 1: 0DTE Options Increase Market Volatility

A common concern is that the high volume of 0DTE options trading contributes to market volatility. The thought broadly is that all this 0DTE volume means that market makers have to hedge exposure to these contracts by pushing markets, like the S&P 500, higher or lower violently during the trading session. So, if there are a lot of 0DTE call options traded then market markets would have to hedge with futures.

However, analysis from CBOE shows that despite the large volumes traded in 0DTE contracts, the net market maker exposure is rather minimal, with average net gamma exposure ranging from just 0.05% to 0.20% of daily S&P futures. In English, this means that although there’s huge volume in 0DTE contracts, much of that volume is balanced trading strategies (mostly spreads) such that the net exposure market makers have to hedge is low.

The pie chart above shows the breakdown of SPX 0DTE strategies for 2023. You can see that there was a fairly even distribution of the most popular strategies, including outright puts and calls, spreads, condors/butterflies, and other strategies. Visually, this reinforces the diverse range of strategies 0DTE traders are using, which I believe is helping to contribute to the overall balance in the market. And, it’s this balance in the market of exposure for traders which helps market makers maintain a low-risk hedging position.

Myth 2: 0DTE Options Are Too Risky for Retail Traders

There’s no disputing that 0DTE options carry higher risks due to their short duration, but only in that their entire lifecycle is compressed which just means that things happen faster than a traditional 45 DTE iron condor position for example. But these risks can be managed by trading defined-risk strategies like credit spreads and iron condors, and sticking firm to proper position sizing and allocation guidelines. If anything, the case could equally be made that holding positions overnight (multiple nights for longer-dated contracts) is equally as risky for traders.

Myth 3: 0DTE Options Aren’t for Beginners or Small Accounts

Not true. Personally, I love trading with 0DTE contracts because I can see the full trading cycle quickly, which gives me feedback (in the form of performance) much quicker than holding trades for multiple months. While some advanced traders may deploy more complex strategies in 0DTE trading, I prefer simple strategies like selling credit spreads and iron condors.

Additionally, I often hear mumbling from traders that 0DTE is only for traders with a large account sizes and big portfolios. But, again this isn’t the case because you can easily define your risk, even with a large notational product like SPX, by making your spreads tight and narrow. In fact, all of my personal trades in SPX so far have been trades with ~$500 of risk or less precisely because I want to keep position sizes small.

Biggest Risks When Trading 0DTE Options

Trading 0DTE contracts has become a new favorite strategy of mine, both for its potential to generate high trade counts and its quick feedback loop, which helps reach performance objectives faster. However, I want to be upfront about what I believe are the biggest risks associated with 0DTE options because while I love the strategy category, it’s far from risk-free.

1. High Sensitivity to Price Movements: One of the main risks with 0DTE options is its sensitivity to market movements. Given their extremely short lifespan, even a small shift in the SPX price or some random news of the day sending the markets up or down quickly can result in your position quickly going underwater. And while there is no “avoiding” this risk directly, it requires that you have a sound, data-driven strategy before jumping in.
   
   For example, I personally use the Peg research as a fundamental part of my bots that trades 0DTE contracts because I can lean on the statistics of the SPX trading inside certain percentage ranges throughout the trading day, and build strategies to take advantage of this over time.

2. Liquidity Issues Can Arise: Another challenge I have with 0DTE contracts is that sometimes liquidity, even in SPX, becomes a challenge. While it’s true that broadly SPX is insanely liquid compared to almost everything else, I have found that sometimes certain strikes just don’t have the same liquidity as others.
   
   Maybe it’s because the market moved away from strikes and therefore the ‘focus’ of the liquidity has shifted or maybe all the positioning during the day has finished and traders are less likely to trade. But whatever the cause, it’s sometimes difficult to execute trades at favorable prices and can lead to a bit more slippage than I would ideally like.

3. Hedging Is Difficult: Given their short lifespan, there’s a balancing act between trying to give 0DTE positions enough time (hours) to work out and being willing and able to hedge for moves that could send your trades underwater for the day. For example, I’ve tried selectively hedging with some long calls and puts to protect from large, late-day moves but it hasn’t worked out perfectly yet and is still a work in progress. And then there’s a balancing act of not overpaying for protection while simultaneously not getting the protection you actually need to cover the rest of the positions.
   
   To me, this struggle to hedge underscores the importance of having a reliable trading strategy set up to begin with. Hedging should help improve the performance of the base strategy and shouldn’t be a strategy in and of itself. And right now that’s a challenge for 0DTE trading for me I’m still working on.

How to Start Trading 0DTE Options: My Approach

If you’ve gotten this far and are eager to dive into 0DTE options trading with me, then having the right tools can make all the difference. Personally, I rely on several powerful tools within the Option Alpha platform to help streamline my 0DTE trading:

1. ‍0DTE Oracle: The 0DTE Oracle was built specifically to help analyze and enter 0DTE options based on historical backtested position data and live market conditions. I use it religiously to find and filter for positions that meet my criteria. For example, a common setup I look for is SPX iron condors that are .30% out-of-the-money (OTM) with a 100% reward to risk ratio after 11am EST.
2. 0DTE Backtester: Another tool I reference daily is the backtested position results for any potential trade I’m looking at right now with the 0DTE Oracle. Rather than having to run a backtest yourself, the 0DTE Oracle does the heavy lifting for me by backtesting each trade's metrics against the underlying's previous 1 year of intraday minute data to see how trading a similar position daily would have performed over that time. Quickly viewing this helps me understand the potential risk curve associated with each trade.‍
3. Automated Bots: 0DTE requires a lot of attention and there’s no way I could consistently scan and execute trades as fast as I need to without bots. The time commitment would be too great and even if I could find the time to do it, I wouldn’t be nearly as efficient or systematic about my approach if done manually. Bots are critical, in my opinion, for 0DTE trades because they can scan more opportunities and analyze more positions than I ever could as a human. Plus, since bot templates are shareable, you can find and test multiple approaches to 0DTE trading that have been shared in the Community by other traders.

0DTE options trading has emerged as a dynamic and fast-growing segment in the options community. The rise in 0DTE volumes, particularly with SPX options, suggests that 0DTE is both here to stay and growing in significance that it can no longer be avoided or ignored by traders. Instead, consider embracing it, as I have, and going on a journey to figure out how to take advantage of the opportunities that 0DTE trading presents. As always, with the right tools and a conservative approach, 0DTE can become a great addition to your portfolio.