What Are 0DTE Options: A Guide to Trading Zero Day Options
While trading zero days to expiration options isnât new, its glamorization has gained plenty of traction, thanks to the spread of screenshots across social media featuring impressive gains and profits from trading such derivatives. From a mainstream media perspective, it seems that retail traders are becoming increasingly interested in the highly volatile derivative that is zero-day options.Â
According to a recent Bloomberg study, retail traders make up about 40% of zero days to expiration (DTE) options as they buy up S&P 500-related contracts. Whether theyâre driven by the fear of missing out (FOMO) or greed, we may be seeing an entire mindset shift in the way retail traders are embracing the volatility of 0DTE options. From understanding the potential profits that can be reaped from the highly volatile derivative to grasping the risks involved when trading them, hereâs everything you need to know when it comes to trading zero-day options in the crypto market.
Key Takeaways:
Zero days to expiration (0DTE) options, often referred to simply as "zero-day options" or "zero-DTE options," are a type of financial derivative contract.
Unlike traditional options that may expire in weeks or months, 0DTE options have an expiration period of just one trading day.
Due to their high volatility and rapid price movements, zero days to expiration options arenât recommended for beginners. It's advisable to gain experience with traditional options strategies before attempting to trade ODTEs, which is considered to be one of the more advanced trading strategies available.
What Are Zero Days to Expiration Options?
Zero days to expiration options (0DTEs), often referred to simply as zero-day options or zero-DTE options, are a type of financial derivative contract. What sets them apart from traditional derivatives is their incredibly short lifespan. Unlike traditional options, which may expire in weeks or months, zero days to expiration options have an expiration period of just one trading day.
As 0DTEs tend to lead to significant volatility in option premiums throughout their lifespan of a single trading day, theyâre often only traded by those experienced in crypto options trading. Labeled by some to be the "extreme sport" of the traditional options market, zero-day options are extremely time-sensitive, and require active monitoring by traders in order to avoid losing out on gains made from their options trades.
How Do 0DTE Options Differ From Traditional Options?
To better grasp the concept, let's compare 0DTE options with traditional crypto options. Traditional options contracts offer traders the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) on or before a predetermined expiration date. Whether these crypto options are used for hedging or leveraged trading, they ultimately provide ample time for market conditions to evolve and for the options to gain or lose value over time.
Zero days to expiration options, on the other hand, cut out all the time between the purchase and the expiration. Theyâre settled on the same day theyâre traded. This means that the price of the underlying crypto asset must move quickly and significantly in the desired direction in order for the crypto trader to profit from the risky trade. Due to the short lifespan of these options, theyâre significantly cheaper than their traditional counterparts that have weeks or months to expiration.
Benefits of Trading Zero-Day Options
Highly Capital Efficient
One of the primary benefits of 0DTE options is their capital efficiency. Since 0DTEs have a very short duration, traders can allocate a smaller amount of capital as compared to traditional options. To further leverage their trades, crypto options traders tend to purchase out of the money (OTM) options contracts, which can be even more affordable given their low delta. This allows for more aggressive trading and risk management strategies, offering crypto traders the chance to make profits worth multiples of the capital theyâve committed to a trade.
Reduced Time Decay
Time decay, also known as theta, is part of the option greeks and is a significant factor in options pricing. Traditional options lose value as time passes, but this effect is greatly reduced in zero days to expiration options. Since they expire the same day theyâre traded, time decay has minimal impact, and crypto options traders can focus more on the directional movements of the underlying asset.
Risks Associated With Zero Days to Expiration Options
High Options Volatility
While 0DTE options are affordable and capital-efficient, they come with the trade-off of high volatility. Theyâre exceptionally sensitive to price swings in the underlying asset, which can lead to both rapid gains and losses, making them unsuitable for risk-averse traders who arenât used to such volatility.
Limited Time for Adjustment
Traditional crypto options offer the luxury of time for traders to adjust their positions or strategies as market conditions change. This can include repairing an options trade by rolling the contract forward, or doubling down on an already established position. Unfortunately, 0DTE traders donât get to enjoy this luxury. Once you enter a position, the clock is ticking as theta decay kicks in, and there's very little time to react to adverse movements in crypto prices.
How to Trade Zero Days to Expiration Options
While trading zero days to expiration options may sound simple, the risk of options trading is compounded, thanks to the huge volatility in option premiums and the chance of your purchased options contracts expiring worthless. To make 0DTE options trading more manageable, weâve compiled some tips to give you a better understanding of what youâre getting yourself into â and to better prepare you for the possible risks ahead.
Choosing the Right Underlying Asset
Trading zero days to expiration options requires careful selection of the underlying asset. It's crucial to choose assets known for their intraday volatility. Popular choices often include certain stocks, exchange-traded funds (ETFs) or indices. With crypto options now becoming an increasingly popular niche among crypto traders, youâre free to explore all kinds of option strategies with Bitcoin and Ether acting as the underlying asset of said contracts.Â
As ETH tends to behave more erratically as compared to BTC, the preference of choosing the right underlying asset ultimately depends upon your risk appetite and how comfortable you are with potentially owning the underlying asset. This might happen if the options contracts expire in the money (ITM). Find out more with Bybitâs USDC options today.
Strategies for Trading
Trading zero days to expiration options demands proper risk management and a sense of the existing market sentiment. Experienced crypto options traders often use techniques such as scalping and momentum trading to navigate through the volatility and come out on top. As these strategies rely on quick market movements and precise timing, 0DTE option trading tends to shine because gains and profits are maximized when a trade goes well.
0DTE Options vs. Weekly Options
Find the term âweekliesâ familiar? If youâve traded crypto options long enough, youâll likely hear about weekly options, and how theyâre also regularly days-traded. It's worth noting that zero days to expiration options arenât the same as weekly options, which have longer expiration periods of about five trading days. While such weekly options provide more leeway as compared to zero-day options, theyâre still shorter-term instruments than traditional options, and highly risky. Thatâs why crypto options traders should hold themselves to the same risk management techniques when trading such weekly options.
0DTE Options in Practice: Trading Short-Term Options
To illustrate the potential of zero days to expiration options, let's consider a hypothetical scenario in which a trader uses these options to capitalize on an upcoming blockchain network upgrade from the Ethereum Foundation.Â
For our bull case scenario example, Ethereum once again pulls off a major upgrade that goes off without a hitch, while managing to capture the attention of retail traders who are FOMOing into the market. This will likely cause a short-term rally that drives up ETH prices.Â
In this scenario, a crypto options trader can take advantage by purchasing zero-day OTM call options on ETH just before the announcement of the major network upgrade. If the upgrade does indeed go as planned, and the rally does in fact happen, ETHâs price may surge, resulting in significant profits for the trader within a single trading session. This is because the sudden ETH volatility will cause the call option premiums to greatly appreciate as ETH heads toward the strike price of the call options that the crypto trader just purchased.
On the flip side, for our bear case scenario example, if the crypto options trader has a more bearish mentality toward the future catalyst, zero days to expiration OTM put options on ETH can be purchased instead.Â
The ideal scenario for this would be if the network upgrade is delayed and pushed back because of fundamental execution errors. This would likely cause fear in the short term as retail traders cast doubt on the Ethereum Foundationâs chances of successfully pulling off network upgrades without causing any disruption to blockchain activities. As a result, ETH prices would plunge, causing the 0DTE puts to suddenly be ITM, as ETH prices approach the strike price of the purchased put contracts.
Tips for Success With Trading Zero Days to Expiration Crypto Options
Success in trading zero days to expiration crypto options requires discipline, quick decision-making and thorough research. Here are some final tips for a better understanding and grasp of this high-risk strategy for trading options.
Develop a Clear Trading Plan and Manage Risk Effectively
Executing a trading plan is essential for success when trading 0DTE crypto options. After all, you donât want to be âbag holdingâ your options if things donât play out as planned â since the value of these options can quickly decay if no action is taken. Holding these short-term options can be a real risk if one becomes overwhelmed by the sudden gains and losses incurred. From clear take-profit levels to initiating proper stop losses, a crypto option trader must be aware of these price levels when engaging with 0DTE options.
Know the Underlying of What Youâre Trading
The last thing you want to do when trading 0DTE crypto options is to fall into the FOMO trap â and simply buy according to what the majority of traders are trading. To succeed in taking advantage of the volatility that comes with upcoming catalysts, 0DTE crypto options traders must be aware of the catalysts for their underlying assets. This can include understanding what network upgrades are coming up for Ethereum, or the potential outcomes of lawsuits and legal battles with regulators for Bitcoinâs potential spot ETF.
The Bottom Line
Zero days to expiration options offer a unique and exciting opportunity for traders to capitalize on short-term market movements. Their distinct characteristics, such as reduced time decay and capital efficiency, make them a valuable addition to the options market. However, they come with high volatility and limited time for adjustment, making them a challenging instrument to master. As with any crypto trading strategy, thorough research and a well-thought-out strategy are essential for success.
For more on crypto options trading, check out our comprehensive guide to mitigating portfolio risks and hedging with crypto options. Additionally, you may choose to read up on options expirations and understand what happens when they expire OTM or ITM.
Frequently Asked Questions (FAQs) about Zero Days to Expiration Options
Are zero days to expiration options suitable for crypto beginners?
Due to their high volatility and rapid price movements, zero days to expiration options arenât recommended for beginners. It's advisable to gain experience with traditional options strategies before attempting to trade 0DTEs.
Can I use zero days to expiration crypto options for long-term investments?
0DTE crypto options are designed for short-term trading and speculation. They arenât suitable for long-term investment strategies because they expire within the same trading day on which theyâre purchased or written.
Whatâs the minimum capital required to trade zero-day options?
The minimum capital required for zero-day options can vary, depending upon your chosen underlying asset and strike price. It's essential to assess your risk tolerance and consider the possible outcomes before going ahead with your 0DTE options trading plan.
What happens if my zero days to expiration option expires?
If your purchased 0DTE call option expires ITM, youâll still enjoy a profit, since the underlying asset is bought at your selected strike price and sold to the trader who wrote the options contract at the prevailing last traded price. The reverse is true for 0DTE put options expiring ITM, as you sell to the put writer at a profit.
On the other hand, if your 0DTE call and put options expire OTM, you wonât need to do a thing, since these options simply expire worthless as the funds put toward paying for their premiums decay over time.
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