Best and Worst 0DTE Options Strategies | Zero Days to Expiration Crash Course Ep. 1

Summary

This video script delves into the intricacies of zero days to expiration (zero DT) options, a popular research topic in 2023. The presenter examines the tradable viability of zero DT options compared to traditional duration options, using a case study on SPX intraday options from February 21st. The analysis covers statistics like high and low prices, opening price multiples, and hourly swings, revealing the high risk and potential for significant gains or losses inherent in zero DT options. The discussion highlights the importance of understanding market volatility and the strategic timing of trades to maximize profits while minimizing risks.

Takeaways

• 📈 Zero Days to Expiration (DTE) options have gained popularity in 2023 due to their high volume, strikes, and liquidity.
• 📉 The VIX index does not account for zero DTE options, but the forward slash VX does, ensuring volatility measures remain accurate.
• 🔍 The study focused on SPX intraday options, specifically on February 21st, which had a one percent intraday move, making it a relevant day for analysis.
• 📊 Intraday options price data was recorded for zero DTE, one day, seven days, 14 days, 21 days, and 58 days, analyzing high and low prices, opening price percentages, and largest one-hour swings.
• 💰 Trading zero DTE options is often about buying premium, but the argument is made that selling premium might be more strategic.
• 📉 Zero DTE options lose all their value when the market moves against them, unlike longer-dated options which only modestly decline.
• 💹 The largest hourly swing in zero DTE options can be significant, with a 91% loss observed in the study, highlighting the high risk involved.
• 🚀 Buying puts on zero DTE options can yield high returns, such as 255% in the case of a market sell-off, but this requires precise timing.
• 🌐 Gamma risk in zero DTE puts is approximately eight times that of 30 to 60 day options, indicating a much higher exposure to market moves.
• 💡 The rich premium of zero DTE options does not necessarily mean they should be sold; their high gamma exposure can be beneficial in certain market conditions.
• 🌟 Zero DTE options are appealing for small capital investors looking for large wins, but they come with the risk of significant losses if the market moves against them.

Q & A

What is the main focus of the research discussed in the video?

The research focuses on zero days to expiration (zero DT) options, exploring their tradable viability and comparing them with typical duration options.

Why has there been a significant interest in zero DT options in 2023?

The interest in zero DT options has grown due to their increasing volume, strikes, and liquidity.

What is the significance of the VIX and forward slash VX in relation to zero DT options?

While the VIX does not take zero DT options into account, the forward slash VX does, which means that volatility measures used by traders are accurate.

Why was February 21st chosen as the day for the intraday options study?

February 21st was chosen because it had a one percent move intraday, making it a relevant day for analyzing the performance of zero DT options.

What were the specific options analyzed in the study on February 21st?

The study analyzed at-the-money put and call options for the SPX based on opening prices, with zero DT, one day, seven days, 14 days, 21 days, and 58 days to expiration.

What statistics were computed in the study for each expiration?

The study computed the high and low prices, the percent of the opening price, the comparison of opening prices as a multiple of zero DT prices, and the largest swing in one hour for each expiration.

Why might traders consider buying zero DT options?

Traders might buy zero DT options to buy premium, aiming for large gains relative to a small capital investment.

What is the risk associated with zero DT options when the market moves against the trader?

Zero DT options can lose all their value when the market moves against the trader, unlike typical 30 to 60 day options which may only decline modestly.

How did the zero DT options perform in terms of the largest hourly swing on February 21st?

The zero DT options lost 91 percent of their value in the largest hourly swing, highlighting the high risk associated with these options.

What is the potential downside of trading zero DT options?

The potential downside is the high risk and the rich premium they carry, which can lead to significant losses if the market moves against the trader.

What is the future plan for the research on zero DT options?

The researchers plan to continue the series by observing zero DT options on days where the market makes huge moves to see if the results change.

Outlines

00:00

📈 Exploring Zero Days to Expiration (DTE) Options

The video begins with an introduction to zero DTE options, highlighting their increasing popularity in 2023. The speaker discusses the misconception that the VIX index does not account for zero DTE options, clarifying that the forward slash VX does, thus making volatility measures accurate. The focus is on comparing the tradable viability of zero DTE options with typical duration options. The study uses data from February 21st, a day with a one percent intraday move in the SPX, to analyze at-the-money put and call options with various expirations. Key statistics such as high and low prices, opening price multiples, and largest one-hour swings are computed to assess risk and potential gains.

05:01

📉 Risk and Reward Analysis of Zero DTE Options

This paragraph delves into the performance of zero DTE options compared to longer-dated options during a one percent market move. It emphasizes the high risk and potential for significant losses with zero DTE options, contrasting this with the more modest decline in longer-dated options. The speaker discusses the importance of understanding the price action on February 21st to gauge the performance of zero DTE options. The analysis shows that zero DTE options lost most of their value, while longer-dated options retained a higher percentage of their value. The discussion also touches on the potential for large gains if the market moves in the trader's favor, but cautions that the risk of loss is still substantial.

10:05

💰 The Appeal and Risks of Zero DTE Options

The speaker discusses the allure of zero DTE options, which is their potential for large gains relative to the small capital outlay. However, the study reveals that even with significant intraday moves, zero DTE puts only result in gains of up to 1.5 times the debit paid, due to the high premiums they carry. The speaker notes that the starting implied volatility for zero DTE options is often double that of monthly options, making them expensive. The conversation also touches on the high gamma exposure of zero DTE options, which increases the risk when the market makes large moves. The speaker suggests that while zero DTE options may not be suitable for consistent trading, they offer opportunities for traders looking for high-reward, high-risk trades.

Keywords

💡Zero DT Options

Zero DT (Days to Expiration) options refer to financial instruments that are set to expire on the same day they are traded. In the video, this concept is central as the speakers discuss the viability and risks associated with these options. The script mentions that zero DT options have grown in volume and popularity, and they are being studied for their tradability and potential for significant gains or losses within a single trading day.

💡Liquidity

Liquidity in the context of financial markets refers to the ease with which assets can be bought or sold without affecting their price. The script highlights that zero DT options have seen an increase in liquidity, making them more accessible and tradable for investors, which is a key factor in the research being discussed.

💡VIX

The VIX is a measure of market volatility, often referred to as the 'fear index.' The script clarifies that while the VIX does not account for zero DT options, the forward-adjusted VIX (VX) does, ensuring that volatility measures remain accurate. This distinction is important for understanding how market sentiment is gauged in relation to zero DT options.

💡Intraday Options

Intraday options are contracts that are bought and sold within the same trading day. The script uses the example of intraday options on February 21st to illustrate the performance of zero DT options during a day with significant market movement, emphasizing the importance of intraday price action in the evaluation of these options.

💡At-the-Money (ATM)

An at-the-money option is one where the strike price is equal to the current market price of the underlying asset. In the script, the discussion of ATM puts and calls for XPX options is used to analyze how zero DT options perform relative to their opening prices and market movements.

💡Gamma Risk

Gamma risk is the rate of change of an option's delta, which measures the sensitivity of an option's price to changes in the price of the underlying asset. The script states that zero DT options carry significantly higher gamma risk compared to longer-dated options, indicating that they can experience rapid and potentially large price changes in response to market movements.

💡Implied Volatility

Implied volatility is the market's forecast of a likely movement in a security's price, embedded in the option's price. The script notes that zero DT options often have a starting implied volatility that is over two times that of the monthly cycle, highlighting the premium investors pay for the potential of high returns.

💡Capitalization

Capitalization refers to the amount of money invested in a trading account or the total value of a company's outstanding shares. The script discusses how zero DT options are attractive to investors with smaller capitalization accounts due to the potential for outsized returns relative to the capital at risk.

💡Largest Hourly Swing

The largest hourly swing refers to the greatest price movement within a single hour. The script uses this metric to compare the risk and potential gains of zero DT options, showing that while these options can result in significant losses, they also offer the opportunity for substantial profits if market movements are correctly anticipated.

💡Penny Stocks

Penny stocks are low-priced, small-cap stocks that trade at less than $5 per share. The script draws a parallel between the historical appeal of penny stocks and the current popularity of zero DT options, suggesting that both offer opportunities for significant gains with relatively small initial investments, appealing to investors seeking high returns on limited capital.

Highlights

Exploring zero DTE (days to expiration) options for the first time, with more research coming.

Focus on zero DTE options due to their increasing volume, strikes, and liquidity in 2023.

Common misconception addressed: zero DTE options do not impact VIX but are factored into forward volatility measures.

Study focused on SPX intraday options from February 21st, 2023, a day with a 1% intraday move.

Comparison of zero DTE options with other durations: 1 day, 7 days, 14 days, 21 days, and 58 days.

Statistics computed: high and low prices as a percent of opening price, comparison of opening prices, and largest hourly swings.

Zero DTE options tend to lose all their value on a market down move, while longer durations show modest declines.

On a 1% market down move: zero DTE options lost all value, while longer durations retained 64% to 87% of their value.

Largest hourly swing in zero DTE options resulted in a 91% loss.

Zero DTE put options can result in significant gains (up to 255%) if the market moves in the correct direction.

Gamma risk for zero DTE options is approximately 8 times higher than for 30 to 60-day options.

Zero DTE options carry high premiums, often double those of monthly cycle options.

Despite high premiums, zero DTE options present significant risk, particularly in large market moves.

Zero DTE options provide opportunities for smaller, lower-capitalized accounts but come with substantial risks.

Future research will focus on zero DTE options during significant market moves to assess performance and potential strategies.

Transcripts

[Music]

foreign

exploring zero DTE we promised you we

would take a look and here we go

um this is our first

piece of research on zero DT options we

have a bunch more coming just so you

know exploring zero days to expiration

options let's go to the first slide

and I also have some notes to myself

here just so you know so that I don't

miss anything

all right I'm ready

so with the growth in volume

strikes and liquidity of zero DT options

it's been the most requested research

topic so far in 2023. today we'll begin

a series on these options to compare and

contrast their tradable viability

um versus our typical duration right

we're going to attack this from lots of

different things and by the way you've

probably been reading because there's a

million people publishing articles on oh

my God no zero DT options are so big now

but they're not the vix doesn't take

them into account so the whole Market's

screwed up and all the pricing's wrong

and it's like no it's not okay slow down

the vix doesn't take into account but

the forward slash VX does and we all use

the forward slash PX so our volatility

measures are actually spot on okay so

that's a good headline for people yeah

it's a good headline but go for one

second

the retail investor doesn't know that

everybody else knows and that's why they

can't profit blah blah blah yeah don't

don't buy into any of it everybody

everything's per priced perfectly

um let's go next slide

so

in this study today looked at the SPX we

looked at the intraday options and we

started with one day we took February

21st which is two days ago and the

reason we used that was because there

was a one percent move intraday

okay and it's important for for purposes

of explaining

um why we chose this because there's so

much data in every day but we chose this

one day because we were up a percent we

we closed we we basically gave up a full

percent and that makes the discussion

you know so much more relevant because

it's a perfect day to look at that so we

did is we looked at

um the at the money put and call for the

xpx options based on the opening prices

from two days ago we recorded the

intraday options price data for the

following options for the zero DTE for

the one day for the seven day the 14 day

the 21 Day and the 58th day there wasn't

a 48 day so that's I mean a 45 days

that's why we did that

we computed the following statistics the

high and low prices a percent of the

opening price the comparison of opening

prices as a multiple of zero DT prices

and the latest I'm sorry the largest

swing in one hour for each expiration

like how much risk were we really taking

and

um

uh

and I think you're going to be surprised

by some things because so why do you

trade a zero DT option this is sell

premium to buy premium

I would argue that it's to buy premium

okay that would be you would argue that

right what's that that's your argument

that would be my argument and I don't

think you're right and I have a feeling

I don't think you're alone I have I have

a feeling that you're gonna stick a

knife in my back right now I feel I have

a feeling like you set me up I'm not

gonna stick a knife in your back like

like I feel like I was set up with that

question you were

and you're gonna see in one second why

let's go to the next slide

so it's also important to understand the

price action of why we chose February

21st to understand how zero DT options

perform because zero t zero days to

expiration options and by the way Tony

and I came up with that zero TT just for

the record didn't exist now everybody

uses it zero DT options will have

drastically different results depending

on price action of the day so we must

categorize the price action in question

for the study on February 21st The Ranch

in the SPX when we started our study a

few minutes after the opening to the

close was just under 50 points meaning

that the expected move was breached by

only a few points expect to move that

day was like in the high 40s whatever it

was okay next slide please okay so here

we'll get started getting to the meet

when the market goes against you the

zero DT options will lose all their

value whereas a typical 30 to 60 Day

Option has a modest decline of 10 to 20

this is on a one percent move in the

market remember Okay so

as these are SPX calls and they all

opened on the high of the day the zeros

the ones the seven days the 14 days the

April expiration they all open the high

of the day

at the low of the day the zero days were

zero okay of course the one days you

know they went down by 35 percent the

seven days

um went down by 64. the I'm sorry daily

left that would be that would be that

that's what they had left at the end of

the day right right um yeah they had 64

left the 14 days said 74 left on a one

percent down move the 21 days had 80

percent left and the April expiration

which is 50 I had 87 left so so the

difference go ahead no so the point

you're trying to show here is you know

if you are trading this from the from

the from the long side it's feaster

famine it's feaster which is fairly

obvious of course on a zero Day Option

now we look at longer dated options give

yourself time to be right when you're

completely wrong here you're not

completely wrong by 100

on a longer dated option that is correct

so the the the again the point here is

that

um uh

the the whole takeaway from here is you

know if you're

how much do you want to lose if you're

going to be wrong

and there's the percentages I hate to

look at it that way but I get your point

so the inverse you know if you do if you

do the one week options you were lost 35

percent if you did the the April options

you were lost 13 okay that's just how it

works

the opening price as a percent of the

zero DT price

so you know again

this is

kind of already been stated this this

this particular number here

um

um but

I think the last line is more

interesting which is the largest hourly

swing which again largest hourly swing

the market sold off in this case in the

last hour so in the last hour the zero

DT options lost 91 percent

okay now I'm just going to give you a

little bit of push back and and argue

that if you were to catch that move

correctly then that put if you're going

to make things completely equal since

the market sold off gives you a huge

bang for your buck I'm not going to put

a number to it because these are calls

we're going to do puts in seconds

okay all right okay we're gonna see

exactly what the number is okay so these

are calls so

um you know these are these are what

happen on your call positions so if you

go to the next slide

so these are your put positions so this

is what you're saying if you caught this

correctly you know how good was it so on

the in the case of the puts if you

bought the puts on the opening

um you made 255 percent I mean that's

the daily highest percent of the opening

price so you basically you made uh about

1.5 1.6 times your money okay that's the

best you can do on a one percent

turnaround sure okay and now when you

compare this to how the other ones did

the one day the seven day the 14 day the

21 Day and the April expiration those

aren't that bad either no no no no you

you're certainly getting I mean just

just throwing it out there

um

and when you look at the largest hourly

swing

but the takeaway from that is when

you're directly right you make money I

mean so that's a good when you're

directionally right you make money but

you make significantly less money than

you lose can you go back to the first

Slide John I mean not the first side

slide four

okay just take a look at this on the

bottom largest hourly swing this is what

this is your worst case

91 you lost 60 you lost 18 just to the

first three and then 13 okay go to the

next slide

on the win side you made 66 31 18 so it

was more challenging but on the further

days to expiration actually made more

money

in the largest hour to swing than you

lost

okay that's actually pretty interesting

yep

um let's go to the next oh let me just

see what he says here

um if you're buying puts Edition in

anticipation of a down day a modest down

day with a 50 point high to low resulted

in a profit of 155 percent

the initial put premium if you got out

at the High

and that's a very big assumption sure if

you got out of time okay

let's go to the next slide

in terms of gamma risk

the zero DT zero days to expiration puts

carried roughly eight times the exposure

as measured by the largest hourly swing

then the 30 to 60 day options and you

can see this is the same the same slides

the last slide but you can see the

largest hourly swing if it goes your way

um and verse so so you're just you're

increasing your gamma Risk by 8x

that's it people just wanted to know

like how much more risk am I taking well

you know if you're short eight eight X

that's what I don't think that would

surprise anybody that's just what it is

right okay

let's go to the next slide

so we have two pages of takeaways here

which is a lot of stuff the zero DT

options have become more popular because

they're Allure of large wins relative to

a small capitality that's what Tony said

you bet a little win a lot potentially

not a big move in this study we showed

that even in large intraday moves of 50

SPX points the zero DT puts would have

resulted in a gain of only 1.5 times the

debit paid at best that's buying a loan

selling the high

this is due to the rich premium that

they carry and you can't blame them

because you know who's going to give you

a cheap premium for these it's not going

to happen sure the starting implied

volatility for the zero DT options

could be and many times is over two

times that of the monthly cycle so

basically you're paying double yeah yeah

which you know I mean essentially for

that bang for your buck yeah you're

paying double for that 8X opportunity

that's what we call Pot odds that's just

the whole game let's go to the next

slide

the rich premium that zero DT's option

does not necessarily mean we should sell

them either

when the gamma exposure being eight

times the monthly option with the game

exposure being eight times a monthly

options the risk will manifest when the

market makes a huge move two standard

deviations or more

although you can't play for those they

do occur a few times a year and at that

point the zero dtas will behave very

differently we will continue the Searing

series by observing the zero DT options

on days

um where the market makes those huge

moves to see if the results

change

um

I think that

there's a good starting point it is I I

mean for for looking at zero day options

and it's only one day that you're

looking at

um I think we have a lot more research

to do on the subject and maybe even come

up with some sort of I

take away from from for me from this is

if you do this a lot you might catch

lightning in a bottle yeah

I think the zero day options you know

not beagle 20 years ago penny stocks

were were the rage because they were

cheap to get into and they were moving

like crazy they gave an opportunity

every once in a while the market kind of

shifts into an area where it gives you

um some opportunity for lower

capitalized accounts I think the

Phenomenon with zero day options right

now is giving that

that opportunity to lower

capitalized individuals and accounts and

I think from a buying standpoint they're

looking to catch lightning in a bottle

because they really can't like you have

a smaller account couple thousand dollar

account two three thousand dollar

account it's very hard to sit there and

try to make twenty Thirty forty dollars

trading options although I think that's

the longevity of trading but what they

want is instant gratification

unfortunately I don't want the instant

pain either

that's the problem

um I think that's why there's a lot of

volume in the zero day options

I do too I just um but I think I'm not

like penny stocks zero day options are

here to stay and you can come up with

something where we can give our viewers

a little bit of Edge on a time frame or

a certain volatility or something that

we can give them you know that shows

them a little bit better win ratio on

their money than I think we've come up

with lightning in a bottle

I think what we're going to learn in the

end is that

it I know we're gonna I know we're gonna

prove that it's incredibly random sure

and I what I think we're going to learn

in the end is that

it's fun but it's maybe a little

counterproductive to like you gotta

you're gonna have to pick certain spot

to sustain a living like that solo on

zero DT right right I think that I think

that's the point yep let's say a quick

90 second bring come back we got more

tasty live with oh joy your friend of

mine Mr Scott shutter next tasty trade

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