Draft:0DTE Options

0DTE options, or zero-days-to-expiration options, are options contracts that expire at the end of the trading day on which they are traded. This means that the buyer of an 0DTE option has less than a few hours to exercise their right to buy or sell the underlying asset.

The Beginning

CBOE has expanded its SPX (S&P 500 index) options offerings to include Tuesday and Thursday expirations, in addition to the existing Monday, Wednesday and Friday ones.. The first Tuesday and Thursday expiring SPX options were listed on April 18, 2022 and May 11, 2022, respectively, for April 26, 2022 and May 26, 2022 expirations. This means that SPX options will now be available every weekday.

Soon after, NASDAQ launched 0DTE options for Nasdaq-100 Index (NDX) in August 2022, CBOE also started SPY (S&P 500 ETF) and QQQ (Nasdaq 100 ETF) in November 2022. Currently, only a few instruments like SPX, NDX, SPY and QQQ offer options that expire every trading day. However, we anticipate that more stocks and ETFs will have 0DTE options available soon.

	1st Tuesday Expiration	1st Thursday Expiration
SPX	4/26/2022	5/26/2022
NDX	8/16/2022	8/18/2022
SPY	11/15/2022	11/17/2022
QQQ	11/15/2022	11/17/2022

Gaining Popularity

0DTE options were initially met with skepticism from some market participants, who argued that they were too risky and could destabilize the market. However, these concerns have not materialized to date. The introduction of 0DTE options has been attributed to a number of factors, including the rise of retail trading, the increasing popularity of options trading in general, and the development of new trading technologies.

0DTE options have become particularly popular among day traders and short-term investors, who use them to speculate on intraday price movements. The introduction of 0DTE options has been a significant development in the options market. It has created a new opportunity for traders to profit from short-term price movements in the underlying asset.

The Properties of 0DTE Options

1. Higher Extrinsic Value: Buying and selling options that expire on the same day and repeat everyday can harvest more time value than holding one option that expires in several days if the underlying price and volatility stay at the same level.
2. Rapid Decay of Extrinsic Value: Since an 0DTE option has a noticeably short life, literally six and a half hours if a position was created at market open. During this brief period of time, its extrinsic value decreases precipitously and eventually become zero when the option expires. The closer an option is to expiration, the faster it loses value, because there is less time for the stock price to move in favor of the option holder.
3. Reduce Overnight Risk: Overnight risks are the unpredictable events that can happen when the market is closed, such as earnings announcements, geopolitical tensions, natural disasters, or market crashes. These events can cause huge gaps in the opening prices of the underlying stocks, which can wipe out your option positions or make them worthless.

Black swan events are rare and unpredictable events that can have a huge impact on the stock market. They often happen when the market is closed or over the weekend, leaving traders exposed to overnight risk. To avoid this risk, it is advisable to close the position and hold cash overnight. We can also avoid overnight risks by trading 0DTE index options (SPX and NDX) which expire at the market close and settled with cash. SPY and QQQ options are physically settled, thus they are still exposed to overnight risk. These 0DTE index options allow traders to take advantage of rapid time decay without worrying about overnight risk. They also enable traders to start each day with a clean slate and adjust their positions accordingly.

4. Easy to Maintain Neutrality: Trading 0DTE options has some advantages over trading weekly options, especially for delta neutral traders. Delta neutral trading is a strategy that aims to reduce the directional risk of an option position by adjusting the delta exposure to zero or near zero. Delta exposure measures how much an option's price changes when the underlying asset's price changes. A delta neutral position should not be affected by small movements in the underlying asset's price, but only by changes in volatility, time decay, or other factors.

One of the challenges of delta neutral trading is that the delta exposure changes constantly as the underlying asset's price. This means that the trader has to adjust the position frequently to maintain neutrality. This can be costly and time-consuming, especially when the underlying asset's price moves violently or gaps up or down. For weekly options, this can happen often, as the market can react to various news and events throughout the week. The trader may have to adjust the position several times a day or even more, depending on the market conditions.

However, for 0DTE options, the trader only has to deal with the intraday movements of the underlying asset's price. The market is less likely to gap up or down within a single day, this means that the delta exposure is more stable and easier to adjust. The trader just need to focus on the intraday trends and patterns to identify entry and exit points to maintain neutrality

0DTE options are not suitable for beginners or risk-averse traders, as they require a high level of skill, experience, and discipline. They also require constant monitoring and adjustment, as the market conditions can change quickly and unpredictably. 0DTE options are best used by advanced traders who have a clear trading plan, a sound risk management strategy, and a strong understanding of the option Greeks.