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

Zero Days to Expiration (0DTE) options are a type of options contract that expires on the same day it is traded. Here are key points to understand about 0DTE options: 1. **Characteristics**: 0DTE options have an expiration date that is the same as the trading date, indicating the last day to exercise the option. They are commonly found in markets for indices like SPX and NDX, and for ETFs like SPY and QQQ. 2. **Trading Strategy**: Traders use 0DTE options to capitalize on short-term volatility and to potentially earn quick returns. The strategy involves buying or selling options with a very short time until expiration, which can lead to significant price swings due to the rapid approach of expiration. 3. **Risks and Rewards**: 0DTE options can be extremely lucrative but also risky. The high volatility and short duration mean that there is a high risk of loss if the predicted move does not happen quickly. The potential for large profits within a short period attracts traders who seek to exploit short-term market movements. 4. **Market Closure**: The options market closes at 4:00 p.m. EST, which means 0DTE options can no longer be traded after this time. However, there may be a grace period for exercising the option beyond the market closing time. 5. **Exercise and Assignment**: 0DTE options that are in-the-money (ITM) at expiration are automatically exercised, while those that are out-of-the-money (OTM) expire worthless. The process of exercising options that expire on the last day of their lifecycle is similar to exercising regular weekly or monthly options, with a cutoff time of 5:30 p.m. ET. In conclusion, 0DTE options are a high-risk, high-reward trading instrument that requires traders to be very attentive to market movements and to have a clear risk management strategy in place.