0DTE Covered Call Strategies: Balancing Income and Risk in Turbulent Markets

In the volatile market environment of 2025, structured ETF strategies have emerged as critical tools for income-focused investors seeking to balance risk and reward. Among these, zero-day-to-expiry (0DTE) covered call strategies—exemplified by the Roundhill S&P 500 0DTE Covered Call Strategy ETF (XDTE)—have garnered attention for their ability to generate high-frequency income while navigating market turbulence. However, their efficacy in mitigating downside risk remains a subject of debate, particularly as volatility spikes and structural challenges test the resilience of these strategies.

The Mechanics of 0DTE Covered Call Strategies

A 0DTE covered call strategy involves selling call options with same-day expiry on an underlying index, such as the S&P 500, while maintaining a long position in the index to replicate its performance. This approach aims to capture theta decay—the erosion of an option's time value—while capping upside potential in exchange for premium income. For instance, XDTE employs a synthetic covered call structure, selling out-of-the-money 0DTE calls and holding deep in-the-money calls to mimic S&P 500 exposure0DTE S&P 500 Covered Call Strategy ETF | Invest with XDTE^[5].

Retail investors have increasingly embraced 0DTE strategies, accounting for 50-60% of SPX 0DTE trading volumeRisk and reward: New insights on 0DTE option trading^[2]. This surge reflects the appeal of known maximum losses, as over 95% of 0DTE trades involve predefined risk limits, making them less susceptible to large drawdowns compared to traditional options0DTEs Decoded: Positioning, Trends, and Market Impact^[1]. However, the ultra-short-term nature of 0DTE options introduces unique challenges, including wider bid-ask spreads and heightened sensitivity to rapid price swingsXDTE ETF Stock Price & Overview^[4].

Income Generation in Volatile Markets

XDTE's performance since its March 2024 launch underscores the dual-edged nature of 0DTE strategies. The ETF delivered a total return of 12.96% in the past year, with an average annual return of 16.48%XDTE ETF Stock Price & Overview^[4]. Weekly distributions, such as $0.2104 on September 11, 2025, and $0.21309 on September 4, 2025, have contributed to a distribution yield of approximately 25%XDTE ETF Stock Price & Overview^[4]. These payouts, however, have occasionally exceeded the fund's income and gains, raising concerns about sustainability0DTE S&P 500 Covered Call Strategy ETF | Invest with XDTE^[5].

During volatility spikes, such as the April 2025 tariff-related downturn, XDTE experienced a maximum drawdown of -19.09%XDTE vs. TSPY — ETF Comparison Tool^[3]. While this outperformed the -33.50% drawdown of the Volatility Weighted ETF (SVOL), its risk-adjusted metrics tell a mixed story. XDTE's Sharpe ratio of 0.69 and Sortino ratio of 0.94 during June-September 2025 indicate moderate returns relative to volatility, though trailing behind the S&P 500's Sharpe ratio of 0.80XDTE vs. SVOL — ETF Comparison Tool^[6].

Risk Mitigation: A Double-Edged Sword?

The effectiveness of 0DTE strategies in mitigating risk hinges on market conditions. During periods of elevated volatility, such as the June-September 2025 period, XDTE's synthetic covered call structure provided limited downside protection. A report by PortfoliosLab notes that XDTE's daily standard deviation of 15.72% was significantly lower than SVOL's 38.99%, suggesting reduced price fluctuationsRoundhill ETF Trust - Roundhill S&P 500 0DTE Covered Call Strategy ETF^[7]. However, the ETF's full overnight S&P 500 exposure left it vulnerable to sell-offs, as highlighted by a Markets Gone Wild analysisXDTE’s Volatility: Uncovering the Risks Behind the Fund’s Construction^[8].

Retail investor behavior further complicates risk dynamics. While participation in SPX 0DTE trading temporarily declined during volatility spikes, it rebounded swiftly as conditions stabilized, reflecting adaptabilityRisk and reward: New insights on 0DTE option trading^[2]. This resilience, however, does not negate structural risks, such as the bid-ask spread costs inherent to 0DTE optionsXDTE ETF Stock Price & Overview^[4].

Strategic Considerations for Investors

For income-focused investors, 0DTE covered call strategies like XDTE offer compelling yields but require careful evaluation of market context. Key considerations include:
1. Volatility Regimes: These strategies perform best in moderate volatility environments. During sharp downturns, the lack of hedging in funds like XDTE can amplify lossesXDTE’s Volatility: Uncovering the Risks Behind the Fund’s Construction^[8].
2. Liquidity and Costs: Wider bid-ask spreads in 0DTE options increase transaction costs, eroding returnsXDTE ETF Stock Price & Overview^[4].
3. Sustainability of Distributions: High yields may not be sustainable if payouts consistently exceed earnings0DTE S&P 500 Covered Call Strategy ETF | Invest with XDTE^[5].

Conclusion

The 0DTE covered call strategy represents a nuanced tool for income generation in volatile markets, blending high-frequency premium capture with structural risks. While XDTE's performance highlights its potential to outperform traditional benchmarks during moderate volatility, its limitations during sharp downturns underscore the need for complementary risk management. As retail adoption grows and market dynamics evolve, investors must weigh the allure of elevated yields against the inherent trade-offs of ultra-short-term options strategies.