0DTE

0DTE options, aka zero days to expiration, are option contracts that expire at the close of the day they are opened. Every option has a set expiration date. If you are trading a 0DTE option position, you entered the trade on the same day the contract expires, regardless of how long the contract has been available.

What is 0DTE?

Most stocks and ETFs offer weekly, monthly, and quarterly options. Index options, such as SPX and XSP, and ETFs that track indexes, such as SPY and QQQ, are available to trade five days a week. 0DTE trading specifically focuses on those contracts that are set to expire by the end of the trading day, meaning traders don’t have to wait until a contract’s expiration date to trade a 0DTE option in that security; every day provides an opportunity.

Advantages of trading 0DTE options

A key benefit of trading 0DTE and next day strategies is that the result of the trade is known quickly. If a trader accurately predicts the market's movement, they can capitalize on within hours or even minutes. Plus, since all 0DTE positions expire at the end of the day, trades are not held overnight so there is no added risk of major market moves while the market is closed.

Increased liquidity is typical for 0DTE options at or near the money, specifically because the underlying indexes and ETFs are highly traded ticker symbols.

In addition, capital requirements are typically lower than those for longer-term options trades because premiums are lower for same-day contracts. This also allows us to reallocate our capital quicker and more efficiently to other trading opportunities.

0DTE options trading also offers frequent trading opportunities. With 0DTE trading, there are multiple opportunities to trade within a single week, particularly for indices and popular stocks that offer weekly options.

0DTE options positions

0DTE positions trade the same as longer-dated options positions. The key difference is the trade is open for that trading session and expires at the end of the day. Therefore, every 0DTE position is a day trade.

0DTE trades are impacted less by volatility and most of the time decay occurs very late in the day. Gamma can have the most significant impact on 0DTE positions because any price changes are magnified with such a short holding period.

Any options strategy can be traded 0DTE. However, there are important considerations when trading 0DTE options.

Important considerations when trading 0DTE

American-style options carry assignment risk. Option assignment risk is an important consideration. Equity options (SPY, QQQ) can be exercised at any time; short options holders are obligated to accept assignment. European-style options (SPX, XSP) are cash-settled and cannot be exercised early, which is why many 0DTE traders prefer index options (more on SPX below).

0DTE options pricing can change rapidly. Because of the close proximity to expiration, price changes in the underlying security can impact the option’s price significantly. While quick profits can be realized, losses can occur just as quickly.

In 0DTE trading, the time decay of options premiums is accelerated, which can yield quick profits or losses as the contract's value erodes throughout the day. However, the impact of time decay (aka theta) may not materialize until late in the trading day due to gamma’s impact at expiration.

Advantages of SPX 0DTE options

SPX offers many benefits that are unique to index options. Here are some reasons why traders love using SPX for 0DTE.

Did you know: According to the Cboe, 49% of SPX trading volume is 0DTE contracts.

Cash settlement

SPX is a European-style option, which means it is cash-settled. This is a huge benefit for traders, specifically 0DTE traders, who want to avoid assignment risk. Plus, one way to avoid day trading is to understand that option positions do not have to be closed. Trades left to expire at the end of the day will not count as a day trade, and can help avoid the pattern day trading (PDT) rule.

No early assignment risk

SPX options can only be exercised at expiration, eliminating the risk of early assignment and reduces the stress of managing positions before the market closes. SPX settlement prices are based on the index price at the end of the day.

Tax treatment

SPX offers favorable tax treatment for options traders under Section 1256. Section 1256 contracts provide significant tax savings compared to equity options. SPX is taxed as a Section 1256 contract, whereas SPY is listed on a securities exchange and taxed as a security.