0DTE Options Explained: What Are They and How Do They Work? (2024)

Options involve risk and are not suitable for all investors. [+] Show details and the options disclosure document.

• SPX options are based off the S&P 500 Index & NDX options are based off the Nasdaq 100 Index. The S&P 500 is an index composed of 500 large-cap stocks that represent the leading industries of the U.S. economy. The Nasdaq-100 Index is designed to measure the performance of 100 of the largest Nasdaq-listed non-financial companies. You cannot buy and sell shares of these indices. SPY is based off the SPDR S&P 500 ETF & QQQ is based off the Invesco ETF. Both ETF's products have shares you can buy and sell that track different indices.
• SPX & NDX options are settled in cash on expiration (since you can't own shares of SPX or NDX). SPY & QQQ options are settled in shares on expiration.
• SPX & NDX options are European style options. European style options can *only* be exercised on the expiration date. Contrast that to SPY & QQQ, which are American style options. American style options can be exercised anytime.

• 0DTE structure — As of the writing of this article, issued daily expirations do not exist outside of SPX, NDX, SPY, and QQQ. It's possible that other indices, exchange-traded products, and equities will offer daily expirations in the future. The current daily expiration offerings are a mix of index & ETF option contracts. To learn more about how index options work, view this article: Equity Index Options.
• Time decay — The limited time until expiration means an accelerated loss of time value for 0DTE's compared to non 0DTE options. This is an example of the impact of Theta (time decay) on the value of an option. To learn more about this subject, view these two articles: Time Erosion vs Delta Effect & Theta.
• Amplified price swings — Price movement in the underlying instruments has a higher impact on the price of a 0DTE option than a non 0DTE would incur. This change is particularly impactful for options trading at the money. This is an example of Gamma impacting the value of an option. To learn more about Gamma, view this article: Gamma.

• Merrill's options chain defaults by design to display the nearest expiration date. Ensure that you are selecting the intended expiration when trading options.
• Be particularly aware of expiration selection when trading SPX and SPXW options that expire on the third week of the month.

• The inability of an account to support exercise or assignment may lead to unintended consequences.
• To learn more Merrill's exercise and assignment practices, view this document: Merrill option exercise and assignment practices (PDF).
• Opening and closing a 0DTE option could possibly result in a trading violation. Please, visit the trading violations page for more information.

• Settlement Risk — Unlike call writing on a stock, a writer of cash-settled index option cannot provide in advance for potential settlement obligations by acquiring and holding the underlying interest. Even if a call writer holds a diversified portfolio of securities, it is unlikely that the call writer will be able to hold the same securities in the same proportions as the underlying index. As such, index call option writers may not be able to offset the risks of their writing positions and can be fully exposed to any increases in the underlying index, which may be unlimited.
• Timing Risk — Option writers typically will not receive a notice of assignment until at least one business day after the exercise. As a result of this time lag between exercise and notice of assignment, even if an index option writer holds securities that match the components of the underlying index, the writer will not be able to satisfy its assignment obligations by delivering those securities against payment of the exercise price. Instead, the writer will be required to pay cash in an amount based on the exercise value on the exercise date. If the value of the index has declined between the exercise date and when the writer first learns of the assignment, the value of the writer's securities holdings will likely also have declined. This represents an inherent limitation on the ability of a writer of an index option to cover risk exposure by holding underlying positions.
• Spread Position Risks — The "Timing Risk" discussed above makes spread positions and certain other multiple option strategies involving cash settled American-style index options substantially riskier than similar strategies involving physical delivery options. This added risk arises from the fact that the index value may change significantly by the time that the writer learns of the exercise assignment. As such, the long leg of a spread strategy may not yield sufficient cash to satisfy the writer's obligation on the exercise assignment.
• Limitations on Use of Index Options to Hedge — Investors who use index options to hedge against the market risk entailed in investing in individual securities should understand the complexities of using index options in this manner. Among other things, investors should be aware that index options may not successfully offset the market risk of the underlying securities and do not protect investors from the credit risk of the issuers of the underlying securities.
• Index Reporting Error Risk — Investors in index options bear the risk that the reported current index level could be in error or the option is exercised before the exercise settlement value of the index for that day is available and run the risk that the level of the underlying index may subsequently change.
• Market Disruption Risk — Current index levels will ordinarily continue to be reported even when trading is delayed or interrupted in some or all components of the underlying index. The risks described above represent a general overview of certain key risks associated with index option writing. These risks do not represent an exhaustive list of the risks associated with option investing generally and index option writing specifically. It is important that you read the chapter entitled the Specialized Risks of Index Options in the booklet Characteristics and Risks of Standardized Options for additional detail and discussion of the risks.

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