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Zero Days to Expiration (0DTE) Options: What Are They & How Do They Work?
What Are Zero Days to Expiration (0DTE) Options?
Zero days to expiration (0DTE) options are option contracts that exist for a single trading session and expire on the same day that they are traded.
A 0DTE option could be a longer-term option that has reached the last day of its lifecycle, or it could be a specific option that’s listed only for a single day.
Interest in 0DTE options, and other short-dated options (5DTE or less) has grown significantly in recent years. For example, the New York Stock Exchange reported that 56% of all retail options volume is now in options with five or fewer days to expiration, as compared to about 35% in November 2019.
How Do Zero Days to Expiration (0DTE) Options Work?
The only difference between a 0DTE option and a regular weekly or monthly option is the reduced time until expiration. Theoretically, that means the full spectrum of options trading strategies may be applied to zero-day options.
Practically, however, zero-day options aren’t being heavily utilized for sophisticated trading approaches. Instead, most market participants are using 0DTE options to play one-day moves in the market using index ETFs like the SPDR S&P 500 ETF Trust (SPY), which now offers 0DTE options for every single trading day on the calendar.
In most cases, these options are being used to deploy concentrated directional risk using naked calls or naked puts. For example, loading up on out-of-the-money (OTM) calls to try and ride a sharp upside rally in the S&P 500.
As most are well aware, that approach can produce outsized gains with minimal capital at risk. However, it’s also a low probability approach. And a multitude of small losses can eventually equate to a significant loss in capital.
How Does Theta Work on 0DTE?
Theta is one of options “Greeks,” and measures the rate of change in an option's theoretical value relative to the passage of time. This concept is often referred to as "time decay," because all else being equal, options lose value as they get closer to expiration.
For example, if an option is worth $1 with five days until expiration, the theta of that option might be equal to $0.20. That means for each day that passes, the option will theoretically lose $0.20 in value per day.
Because 0DTE options only exist for a single trading session, the entire theta associated with a 0DTE option is applicable to a single day. In other words, the extrinsic value of 0DTE options theoretically decays in a single trading session.
0DTE Options Trading Strategies
The only difference between a 0DTE option and a regular weekly or monthly option is the reduced time until expiration. Theoretically, that means the full spectrum of options trading strategies may be applied to zero-day options.
Practically, however, zero-day options aren’t being heavily utilized for sophisticated trading approaches. Instead, most market participants are using 0DTE options to play one-day moves in the market using index ETFs like the SPDR S&P 500 ETF Trust (SPY), which now offers 0DTE options for every single trading day on the calendar.
In most cases, these options are being used to deploy concentrated directional risk using naked calls or naked puts. For example, loading up on out-of-the-money (OTM) calls to try and ride a sharp upside rally in the S&P 500.
0DTE vs. DTE Options: What Are the Differences?
In the options world, time until expiration is often denoted as “days-to-expiration,” or DTE. This metric encompasses the total number of days between trade initiation and trade expiration.
Options with zero days until expiration only exist for a single trading session and are commonly referred to as zero days-to-expiration (DTE) options, or simply "0DTE.” An option with 21 days-to-expiration may therefore be referred to as 21DTE.
Depending on one’s unique trading strategy, 0DTE options may be the right choice to express a specific market outlook. However, investors and traders should keep in mind that the costs and risks associated with 0DTE options can be higher as compared to weekly and monthly options.
The tastylive financial network recently unveiled new research on 0DTE options, and participants in the options market are encouraged to review that information—covering the potential benefits and drawbacks of zero-day options—when timing allows.
According to extensive research conducted by tastylive, there is evidence suggesting that 45 may be an efficient number for DTE when it comes to short options positions. And based on this research, there are two primary factors at play when it comes to optimizing trade duration: “theta decay” and “time to be correct.”
However, it’s entirely possible that the 45DTE duration won’t fit every trader’s approach and/or outlook when selling options.
FAQs
What is a 0DTE option?
Options with zero days until expiration only exist for a single trading session and are commonly referred to as zero days-to-expiration (DTE) options, or simply "0DTE.”
A 0DTE option could be a longer-term option that has reached the last day of its lifecycle, or it could be a specific option that’s listed only for a single day.
What is a 0TE call?
The only difference between a 0DTE option and a regular weekly or monthly option is the reduced time until expiration. That means that a 0DTE call is basically the same as regular weekly or monthly option.
A 0DTE call is therefore a call option that only exists for a single trading session.
As a reminder, a call option is a derivative contract that gives the buyer the right, but not the obligation, to be long 100 shares of an underlying asset at a certain price (called the strike price) on or before the expiration date.
Generally speaking, the value of a call option will increase as the associated underlying increases in price, or if implied volatility increases. Conversely, the value of the call option will generally decrease if the associated underlying decreases in price, or if implied volatility declines.
When do 0DTE options expire?
Options with zero days until expiration only exist for a single trading session and are commonly referred to as zero days-to-expiration (DTE) options, or simply "0DTE.”
The associated expiration day and time will be listed with the options contract, so investors and traders can ensure they are trading the intended option before deploying the position in the market.
The options market closes at 4:00 p.m. EST, which means 0DTE options can no longer be traded after that time. In that regard, 0DTE options expire at 4:00 p.m. EST on the indicated day of expiration.
However, in terms of exercising a 0DTE option, there may be a grace period in which the option may be exercised beyond the market closing time. For example, the cutoff time to exercise regular weekly and monthly option contracts is 5.30 p.m. ET.
What happens if I don’t exercise a 0DTE option
When 0DTE options expire in-the-money (ITM) they will be automatically exercised, just like regular weekly or monthly options.
Options that finish out-of-the-money (OTM) are not typically exercised, and expire worthless.