What are zero-days-to-expiration options?
Zero-days-to-expiration options, or 0DTE options, become increasingly popular every year. Here's an overview of why they're attractive to some traders and how you can trade them with us.
What are zero-days-to-expiration options?
Zero-days-to-expiration (0DTE) options, also popularly known as same-day expiration options, are all the rage right now (in the world of trading, at least). As their name suggests, these are contracts with less than one day to expiry.
They work in a similar way to longer-term options, which are contracts that give traders the right (or option), but not the obligation, to buy or sell a specified amount of an underlying asset at a predetermined price (called the strike price) by a certain date.
0DTE options are issued every week from Monday to Friday. They're primarily traded on the S&P 500 (SPX); however, NASDAQ (NDX) has a similar offering with smaller volumes.
S&P 500 0DTE options: what should you know?
While short-term options contracts aren't a new thing, these daily options went mainstream during the meme stock mania of 2021. 0DTE options were used by retail traders as a low-cost way of trading the rising and falling prices of meme stocks (stocks backed by a community of traders on discussion forums such as Reddit) like GameStop and Tesla.
This led to the inclusion of indices in 2022, after various retail brokers began to offer same-day expiry options on the S&P 500 index on their platforms.
Institutional investors also jumped on the bandwagon in a big way that same year, so much so that only 5.6% of all the S&P 500’s short-dated options volume in November 2022 came from retail market orders, a JPMorgan study revealed.
According to JPMorgan, one-day option contracts tracking the SPX peaked at a record US$1 billion in daily trading volume in March 2023. In view of 0DTE options’ lightning popularity, Marko Kolanovic, a leading strategist at JPMorgan, warned that ‘Volmageddon 2.0’ (a repeat of February 2018, when short-term exchange-traded products lost over 90% of their value overnight) could be triggered if the current pace of adoption keeps up.
What are the risks of trading 0DTE options?
Just like with any other financial instrument, trading ODTE options comes with its own set of risks, says senior IG analyst Axel Rudolph. They include:
1. Sudden changes in the prices of underlying assets
The prices of underlying assets can move very quickly and unpredictably, especially on days when major economic data such as non-farm payrolls, CPI, rate announcements, etc is released. When selling 0DTE options and the market moves against you, you can lose a large amount of money in a very short space of time.
2. Shorter reaction time
Because 0DTE options expire on the same day they’re traded, you’d need to react very rapidly to any change in the underlying market. This can create a lot of stress and means that market players need to constantly monitor their options trades. However, this may not be possible for most traders, potentially leading to large losses within sometimes minutes.
3. Rapid time decay
If you buy 0DTE options, the rapid time decay in the option works against you and you need to act quickly – and correctly – in order to make a profit.
What are the benefits of 0DTE options?
There are also rewards to be reaped from trading 0DTE options. In Rudolph’s view, they are:
- If you sell 0DTE options, you may benefit from large time and thus premium decay, which can lead to quick and substantial profits in a short space of time
- A lot of people get a buzz from the fast-paced nature of trading 0DTE options, as these options usually trade with a lot of volatility
- You can potentially reap huge rewards in a short space of time if you get your 0DTE option trade right
How to trade 0DTE options
- Decide how you’d like to trade options. You can trade them on exchange with a US options and futures account or over the counter (OTC) with a spread betting or CFD trading account
- Open a trading account. The account you open will be based on how you’ve chosen to trade options
- Pick the market you'd like to trade. With our listed offering, you can trade stock, exchange-traded fund (ETF) and index options in a cash or margin account. If you prefer OTC trading, you can choose between forex, share, index and commodity options
- Choose whether to trade a call or put option
- Pick your strike price and whether to buy or sell
- Place your trade
0DTE options summed up
- Zero-days-to-expiration options, or 0DTE options for short, are options contracts that expire on the same day that they’re traded
- With our listed offering, you can trade 0DTE stock, ETF and index options. With our OTC offering, you can choose between 0DTE forex, share, index and commodity options
- 0DTE options tracking the SPX peaked at a record US$1 billion in daily trading volume in March 2023
- There are both risks and benefits involved in trading these same-day expiration options contracts, so individuals should study them in detail before placing any trades
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
