0dte options: what are zero-day options?

Zero-day options are rising in popularity as they give traders the chance to earn profits quickly, but they come with a huge amount of risk. Let’s take a look at what they are and how 0dte strategies work.

What are 0dte options?

Zero-days-to-expiration options, also known as 0dte or zero-day options, are contracts that have less than one day to expiration. 

The idea behind trading 0dte options is to collect profit from the rapid decay in the premium by selling these options contracts and buying them back at a lower price later in the day.

Most 0dte options strategies are used by day traders, who are looking to speculate on short-term market movements, and not tie up capital for too long or risk overnight movements. But the contracts have become increasingly popular with other market participants looking to use the 0dte options to hedge existing positions too.

0dte options are normally traded on assets that have high liquidity – such as index options or stock options – which means that there’s typically a tighter bid-ask spread.

How do 0dte options work?

0dte options work in exactly the same way as regular options, because that’s exactly what they are. They are simply options contracts that have a much smaller window of time until expiry.

So let’s take a look at what options are.

Options give the buyer the right – but not the obligation – to buy or sell an underlying asset for a specific price on or before a set date of expiry. If the price of the underlying market hasn’t moved beyond that price, called the strike, by the expiry date, the contract is worthless.

But if it has hit the strike, the option is considered ‘at the money’, from which point it starts to have an intrinsic value. The further beyond the strike the price moves, the more ‘in the money’ the option becomes, and the more the trader can earn in profit.

To buy an options contract, you pay a premium to the seller. Options that are more likely to be exercised will come with a higher premium because there’s a greater risk to the seller that they’ll need to cover the position – buying or selling the asset in question. So, ‘in-the-money’ or ‘at-the-money’ options will be more expensive than ‘out-of-the-money options.

Learn more about what options are and how they work

Buying 0dte options

When buying an option on its last day of expiry, you need your predicted move to happen extremely quickly.

You’ll be essentially placing a bet on whether the option will reach its strike price within mere hours. The further away the strike price is from the current market price, the less favourable your odds of this happening are. So, time is actively working against your position, decreasing its value constantly. This is known as theta.

Learn about the Greeks

Whether you exercise your option or not, you’ll be losing the premium you paid to enter the trade. And although options that are nearer the money are more likely to earn you a profit, they also come with higher premiums.

Typically, an options contract is bought well before the expiry, giving traders plenty of time to adjust their position. But 0dte options don’t come with such luxury, meaning 0dte buyers have to be confident that the market movement will occur, and their strike price will be hit, to make the high premiums worth it.

Selling 0dte options

As the expiry is so near, most zero-day strategies involve selling 0dte options. 0tde options traders are hoping to collect the premium by setting strikes further away from the market price and then repurchasing the options for a lower price just before the close.

As this is the last day anyone can enter a position on that option the likelihood of strikes being hit are far less. The theta – or time decay – is working in the seller’s favour.

Buyers of options contracts aren’t bound to exercise the contract if their strike price isn’t met. In this case, they’d walk away empty-handed, while the seller would collect the option’s premium.

But the nature of these high-risk, high-reward options has led to them being likened to a lottery. The stakes are high, and in volatile markets, a lot can still happen.

If the strike price is hit, the seller would be forced to cover their position. Either providing an underlying asset to the buyer or having to buy an asset from them – depending on whether it’s a call or put option.

On the days of expiry, if these options do get in the money, the forced covering can cause very large orders to be placed on stock markets. JPMorgan’s Mark Kolanovic has said that these flows ‘could particularly impact markets given the current low liquidity environment’ causing large daily stock moves.

He likened the rise of 0dte options to the 2018 stock market scare that saw investors’ fear over President Donald Trump’s trade war with China skyrocket. The event caused a surge in volatility trading, particularly on the VIX and inverse-VIX products. 

Learn about implied volatility in options trading

0dte options strategy

Most 0dte options strategies are solely based on collecting the option’s premium. The idea is to open a short trade, selling an options contract before it expires, holding it until you’ve collected the premium, then buying back the option at a cheaper price to close the trade or leaving it to expire. You can think of the strategy as similar to a naked short put or call, short straddle or butterfly that are also aimed at collecting option premiums.

A lot of 0dte options strategies require you to take positions on two or more options contracts – some will be long positions, and some will be short. The short positions are those that will earn the premium because you’re taking the sell side of the trade, while the long positions are to cap your risk.

A lot of these strategies are only effective in a low-volatility environment when prices aren’t moving much. Essentially your position is just whether a strike price will be met, and you’ll have good odds of predicting the direction. But in a high-volatility market, this isn’t the case.

When markets move quickly, it’s common for positions to be in the negative as soon as they’re entered. And the problem with selling 0dte options is that the maximum loss is far greater than the maximum profit. This is called an asymmetric strategy.

If a market’s price moves toward the long strike, your loss will be far greater than your profit if your short position earns its premium. This means that most options traders will attach a stop loss to help manage their risk.

But this is why listening to anyone who calls 0dte options a ‘get rich quick’ strategy is a big mistake. 0dte options are only for the most experienced traders, or those willing to put the time into building their knowledge in a demo account. Novices who jump straight into 0dte options are likely to be left with significant losses.

Discover the options terms you should know

0dte SPY options

The first 0dte options were introduced by the Chicago Board Options Exchange (CBOE) on S&P 500 (SPY) index options.

The exchange first listed SPY options with monthly expirations in 1983, but they were so popular that weekly options were added in 2005.

S&P weekly options have five expiration dates, every weekday Monday through Friday. So, that’s five opportunities for traders to buy 0dte options. This is what makes 0dte SPY options the most popular because most other options only have one expiration per week.

Learn about the S&P 500

Trading options with City Index

City Index offers options trading via CFDs, enabling you to take a position on the underlying price of an options market, without entering an options contract yourself.

You’ll have a choice of 40+ options markets across indices, currency pairs, metals and commodities. And because we offer daily options – alongside weekly, monthly and quarterly expires – you'll easily be able to see the puts and calls that are suitable for 0dte strategies.

Discover how to trade options with City Index