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What is a zero-day option?

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The definition of a zero day option – also known as a zero-day to expiration option or 0DTE – is options contracts that have expiration on the same day they are traded.

To understand what a zero-day option means, we need to understand options trading. Options are contracts that give investors the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a specific future date.                                                                                                                                

Options contracts have an expiration date. Options can expire weekly, monthly or quarterly, depending on the underlying assets

Zero-day options allow traders to open and close a position on the same day the contract expires. Due to the limited trading time, traders must race to execute their trading strategy before the options expire.

Key points

  • Zero-day options, also known as zero-day to expiration options or 0DTE, are options contracts that expire on the same day they are traded.
  • It is an option trading strategy that takes advantage of short-duration trading time to exercise rights to buy or sell options.
  • Traders must race to make a call fast in limited time before the options cannot be traded after the expiration date.

How does a zero-day option work?

As previously stated, an options contract gives the holder the right to buy or sell an asset at an agreed-upon price, also known as the strike price, within a specified time frame or on the expiration date.

When the underlying asset's price falls below the strike price, the buyer can simply let it expire and become invalid. The holder will only receive the option's initial investment cost. When the asset's price rises above the strike price, the option holder can choose to sell the option and profit.

Traders typically have time – days, weeks or even months – to see if the underlying asset's price moves in the direction they predicted. They will not, however, have much time to wait in the zero-day scenarios.

With 0DTE, traders have only hours before the option expires to decide whether to buy or sell. For example, a trader may open contracts in the morning and hold the position until the preferred price is reached. They can either buy them back at a lower price before the contract expires, or they can let the contract expire. If everything goes as planned, the trader keeps the money.

0DTE options have gained popularity among traders due to the ability to lock in capital from positions in a short period of time. By opening and closing trades on the same day, traders can avoid the risk of the price fluctuating overnight, which may reduce their return.

Types of securities for 0DTE

The assets used for 0DTE trading can be stocks, currencies, indices, exchange-traded funds (ETFs) and many more. Basically, any financial assets can be optionable.

For trading in such a short period, traders typically select securities with high daily volume and shorter, more frequent cycles. In the stock market, for example, a stock with a high daily volume is one that trades at least 500,000 shares a day.

Risks of using 0DTE strategy

0DTE has been increasingly advertised as a way to make profit in a day without risks. But even on the same day, the catalysts or reasons that traders use to open a position in the morning could change during the day.

Traders who decide to use the 0DTE strategy must have trading expertise and take time to study the asset they wish to trade, looking at fundamental and technical analysis, and acknowledge the unpredictability of financial markets. Keep in mind that every trading strategy comes with a risk. 

The Bottom Line

The zero-day option could offer potential returns on a position in a short-time. However, one should remember that trading any financial instrument involves risk of losing money.

Keep in mind that your trading or investing decision, as well as your investment strategy, should be based on your risk level, market knowledge and experience, portfolio size and goals. Before investing in any asset, always conduct your own research. Furthermore, never trade with money you cannot afford to lose.


How does 0DTE work?

The zero-day option allows investors to open and close positions on contracts on the same day they are traded. For example, a trader may open contracts in the morning and hold them until the underlying asset of the options reaches the desired price. When this occurs, traders can choose to let the contract expire or profit by repurchasing it at a lower price.

What is the purpose of options trading using 0DTE?

Traders use 0DTE to minimise the loss of returns that could happen when holding the position overnight.

How risky is 0DTE?

Trading or investing in any financial instrument has risks. In zero-day options, risks may be elevated because traders must make decisions in a short-time, sometimes within a few hours. Catalysts for exiting or entering the trade may be changed even in a short-time. They may not go as planned. That’s why 0DTE is advised only for professional traders.

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