Zero Days to Expiration (0DTE) Options and How They Work (2024)

What Are Zero Days to Expiration (0DTE) Options?

Zero days to expiration options, or 0DTE options for short, are options contracts that expire and become void the same day that they’re traded. When an option reaches this stage, there’s not much more time left to act on the right to buy or sell the underlying asset. The window is small, and the move that the trader is plotting needs to happen fast.

0DTE options trading has entered the mainstream in recent years and is a popular premium collecting strategy.

Key Takeaways

  • Zero days to expiration options (0DTE) are options contracts due to expire within a day.
  • 0DTE options enable traders to potentially make a quick buck.
  • The window is small, and the move that the buyer is plotting needs to happen fast.
  • A popular play is to sell options on the last day that they are valid and capitalize on the premium decay.
  • Knowledge of how to execute and hedge these trades is needed, and market catalysts may not pan out as expected.

How Do Zero Days to Expiration (0DTE) Options Work?

An option isa contract that gives the buyer the right—but not the obligation—to buy or sell an underlying asset at a specific price within a specified period. Each option contract comes with an expiration date. If the option isn’t taken up by then, it becomes useless and is no longer valid.

With zero days to expiration options, the expiration date is imminent. The 0 before DTE indicates that this is the last day to make use of the option. Normally, with options, the trader has a fair bit of time to wait and see if the underlying asset moves in the direction bet on. That’s not the case with 0DTEs. At this late stage, time is of the essence.

For some traders, the last day before expiry is the best moment to invest in options. Traders like 0DTE options because they allow an opportunity to capitalize on positions quickly and tie up capital for short periods. Entering and exiting trades on the same day also eliminates the risk of the price moving overnight while the trader is asleep and not in front of the computer screen.

Are Zero Days to Expiration (0DTE) Options Profitable?

Selling and buying options at zero days to expiration can be extremely lucrative or costly. The stakes are high at this late stage, and a lot can happen in a day.

There are mixed tales about this type of investment strategy. Numerous stories have surfaced of people getting burned, leading 0DTE options to be labeled as the equivalent of a lotto trade. When buying an option on the last day before expiry, there’s lots of pressure for the predicted move to happen fast. 0DTE options should be reserved for high-conviction trades only and be hedged accordingly just in case things don’t go according to plan.

For option writers, 0DTE trading is generally much more popular. There are many people out there who swear by this strategy, claiming that it’s possible to make potentially large profits without taking on much risk by selling options that expire within a day.

0DTE options are often traded to take advantage of the exponential decay of premium.

What Kind of Trader Typically Uses This Strategy?

0DTE trades are popular among option writers. The play is to offload on the last day that the option is valid and collect the rapidly decaying premium.

Premium Decay

When purchasing an option, you pay the person selling it (the other party in the trade) for the privilege of giving you the right to buy the underlying asset at the specified strike price. That payment or charge is known as the premium.

Usually, options more likely to be exercised command higher premiums. That means that those “in the money” are more expensive than those “out of the money.” It also generally means that the cost of an option steadily decays as it moves closer to the expiration date and rapidly decays on the last day.

The most popular strategy used by 0DTE option traders is to sell an iron butterfly or iron condor, according to Option Alpha.

Lots of traders try to take advantage of the last day of action. Their goal is to collect premium, and they have the edge of time being on their side and the ability to set the strike price.

The strategy here is to open the position in the morning, hold it until the desired premium has been collected, and then either repurchase the option for a lower price before the end of the day or let it expire. If all goes to plan, the trader makes a quick profit.

Trading Expertise a Must

Contrary to what many people say on the internet, selling 0DTE options isn’t a guaranteed way to strike it rich. A lot can change in a day, and something that seemed certain in the morning may end up backfiring in the afternoon.

Those with experience trading have a greater chance of getting the pricing, timing, and everything right. A novice trying to get rich fast without doing their homework could be left nursing a really nasty loss.

Don’t be fooled into believing that premium collecting is an infallible strategy. Knowledge of how to execute and hedge these trades is needed, and market catalysts may not pan out as expected.

What Types of Security Is This Strategy Typically Used On?

Most stocks, exchange-traded funds (ETFs), and indexes are optionable. However, some are much more popular than others.

0DTE option traders typically opt for tickers with high daily volume and more frequent expiration cycles. Classic examples include ETFs that track the , the Nasdaq 100, or the Russell 2000.

Stop-loss orders should be used to prevent catastrophic losses.

What does DTE stand for in options?

DTE is short for “days to expiration” and basically tells us how many days the right to buy or sell an underlying asset at the specified price is available. Once this time is up, the option is rendered null and void and expires worthless.

When do 0DTE options expire?

A 0 before DTE signifies that the option is set to expire that same day.

What happens if the option isn’t exercised before it expires?

Option buyers are not bound to fulfill the contract. If it is not acted upon by the specified date, the option simply expires. In this case, the buyer would walk away empty-handed and lose whatever sum was paid to the writer (the premium) for the opportunity presented.

The Bottom Line

There’s a lot of talk on the internet about premium collecting on 0DTE contracts representing guaranteed, easy money. Don’t listen to that noise. Unfortunately, there is no such thing as a risk-free, high-return investment.

Yes, 0DTE options serve a purpose and can make investors money. However, they are also fairly complex and volatile, and they can easily blow up in your face if you don’t know what you are doing.

Zero Days to Expiration (0DTE) Options and How They Work (2024)


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