Day Trading 0 DTE Options (Strategies, Risks)

Day trading with 0 DTE (Zero Days to Expiration) options is an advanced and risky options trading strategy. 

We look at the strategies, risks, and general things to know when it comes to day trading 0 DTE options.

Key Takeaways – 0 DTE Options

• Not for Long-Term Holds 
  • 0 DTE (Zero Days to Expiration) options expire the same day they are purchased.
  • These options are highly speculative due to their short lifespan and rapidly decaying time value (theta).
  • With time decay working strongly against them, 0 DTE options are only for short-term bets.
• Goals
  • Goals center on extracting quick profits within an intraday environment.
• Strategies
  • 0 DTE options strategies revolve around exploiting fast theta decay, intraday volatility, and capitalizing on short-term price moves using relatively cheap options.
  • Traders popularly use 0 DTE options to bet on intraday price movements or capitalize on events like earnings announcements that can create volatility.
  • Spreads, straddles, and directional bets are common.
• Risks
  • 0 DTE options are notoriously risky since many expire worthless. So the likelihood of losing your entire premium is high.
  • Extreme leverage and short-dated expiries magnify risks. Traders have to be careful managing position sizes. Avoid overtrading to prevent large losses from even small mispricings.
  • Transaction costs are high as a ratio of the premium.

What are 0 DTE Options?

Expiration on the Same Day

0 DTE options are options contracts that expire at the end of the current trading day.

Weekly Options

Typically, they result from daily options contracts that have been issued with expiration days on every weekday (or nearly every weekday).

It can also refer to Friday day trading, when weekly options are on their expiration day.

High Volatility

0 DTE options can experience large price swings within minutes or hours.

Offers the potential for high returns but also high risk.

What ETFs Have Daily Expirations for 0 DTE Option Trading?

0 DTE options are primarily available on highly liquid index-based ETFs and indices like:

• SPY (SPDR S&P 500 ETF Trust)
• QQQ (Invesco QQQ Trust – tracks Nasdaq 100)
• IWM (iShares Russell 2000 ETF)
• SPX (S&P 500 Index)
• NDX (Nasdaq 100 Index)

Stocks are also very popular choices for 0 DTE options on Fridays, when their weekly options expire.

(Not all stocks or ETFs have an expiration every Friday.)

Why Are 0 DTE Options Appealing?

Rapid Shifts in Value

As the expiration approaches, the time value of an option decays rapidly (especially in the last hour).

This heightened volatility can lead to large profit potential with directional market moves.

High Leverage

Following from the above, options provide leverage, amplifying both potential gains and losses.

With 0 DTE options, this leverage is even more pronounced due to the compressed time frame.

Lower Premiums

Because they are near expiration, these options can be cheaper and allow for higher leverage.

However, they also have a high theta, meaning their time value decays rapidly.

Limited Risk Management

The very short duration until expiration means traditional risk management strategies might be less effective or applicable.

The Risks of 0 DTE Options

Magnified Volatility

Small price movements can cause you to lose your entire premium.

Unpredictable Gamma

“Gamma” measures the rate of change in an option’s delta (sensitivity to underlying stock price).

It gets extremely erratic on 0 DTE options, which can lead to wild price swings

Rapid Time Decay

As expiration nears, the option’s value decays at a high rate.

Even if you’re right about the direction of the underlying, a minor delay can mean it expires worthless.

Transaction Costs

With 0 DTE options being relatively cheap, the transaction costs of paying the bid-ask spread and commissions can represent a significant portion of the option’s premium.

This can drastically eat into potential profits and render the trade less viable if not properly accounted for.

Example

For example, with an even slightly out-of-the-money (OTM) 0 DTE option on a stock, you might see the price quoted as $0.18 (bid) – $0.22 (ask).

This doesn’t seem like much, but if you enter that trade, you’re paying a $4 spread per contract (100 shares per contract * $0.04 per share), and $0-$3 in transaction costs on top of that.

So if you pay a $4 spread and $2 commission, or $6 total, this is already 33% of the option’s value ($18 upon entry).

This sometimes gets lost in the discussion because the option is cheap and the transaction cost is fairly cheap, but as a ratio this is a huge transaction cost.

Even if you were to find a viable strategy with 0 DTE options, it’s difficult to scale anything with a high transaction cost.

O DTE Options Strategies

Harvesting extra premium on an existing portfolio

A strategy using 0 DTE options as part of a covered call approach involves selling same-day expiry call options on stocks/securities/assets you already own in your portfolio.

This tactic aims to generate additional income through the premiums received from selling these calls.

If the stock price remains below the strike price by the end of the day, the option expires worthless. This allows you to retain the stock and the premium.

However, if the stock exceeds the strike price, you may have to sell it at the predetermined price, potentially limiting upside gains.

One way to think of it is – would I sell this asset at this price if it got there?

If the answer is yes, then selling a covered call might not be a bad idea – you get income from selling at a price you would’ve sold at anyway.

Scalping

Aims for small, quick gains by taking advantage of short-term price movements.

With 0 DTE options, scalpers look to enter and exit positions quickly, often within minutes, to capitalize on intraday volatility.

Straddle/Strangle

A long straddle or long strangle strategy involves simultaneously buying a call and a put option (or a combination of out-of-the-money calls and puts) with the same strike price and expiration date.

This strategy is used when traders expect a significant move in the underlying asset, but are unsure of the direction.

Ratio Spreads

Ratio spreads involve buying and selling multiple options with different strike prices in a specific ratio.

For example, a 1×2 ratio spread could involve buying one call option and selling two call options with a higher strike price.

This strategy can be used to create a risk-defined trade with a potential for profit if the underlying asset moves in the desired direction.

Butterfly Spreads

A butterfly spread is a neutral strategy that involves combining a bull spread and a bear spread.

It’s typically used when traders expect a narrow trading range for the underlying asset.

It can be constructed with 0 DTE options to potentially profit from low volatility and minimal price movement.

Directional Plays

Some traders may choose to take directional positions with 0 DTE options, either by buying calls or puts, depending on their market outlook.

Nonetheless, this strategy carries significant risk due to the limited time frame and the potential for rapid time decay.

Momentum Trading

Traders identify stocks with strong momentum (either up or down) early in the trading day and buy corresponding 0 DTE call or put options to capitalize on the continued movement.

This strategy requires a good sense of market timing and trend analysis.

Fade the Gap

Traders use 0 DTE options to bet against the direction of a gap at the market open.

If a stock gaps up, a trader might buy puts expecting the price to fall back.

Conversely, if a stock gaps down, calls might be purchased anticipating a rebound.

News-Based Trading

Trying to capitalize on volatility caused by news events or earnings reports.

Technical Analysis

Using charts and indicators to predict short-term price directions.

Is It Right For You?

Day trading 0 DTE options is generally considered suitable only for highly experienced options traders in select circumstances who have:

Deep understanding of options mechanics

You need more than basic call/put knowledge.

This strategy demands understanding factors like delta, gamma, theta, and implied volatility.

Beginners might have early success (or not), but consistent profitability takes experience and refined knowledge.

Before You Start

Paper Trading

Practice with virtual money on a simulator to understand 0 DTE behavior without risking real capital.

Small Starts

If you do trade with real money, start with very small positions.

Educational Resources

Seek out additional educational resources and tutorials on 0 DTE trading specifically.

Conclusion

Trading 0 DTE options can be viable in certain market conditions, but they’re generally considered a high-risk strategy suitable only for experienced traders with a thorough understanding of options pricing, risk management, and the underlying asset’s behavior.

Wading into 0 DTE options trading without the requisite skills and experience is akin to pure speculation.