Last Updated on 24 February, 2023 by Samuelsson
If you’re familiar with options trading, you may have come across the term “0DTE” or “zero-day to expiration.” In this article, we’ll explain what 0DTE means, how it relates to options trading, and why it’s important.
What is 0DTE?
Zero-day to expiration (0DTE) refers to options contracts that are set to expire on the same day that they are traded. This means that there is no time value remaining in the contract, and its price is entirely based on its intrinsic value.
In contrast, options that have several days or weeks until expiration have both intrinsic value and time value. Time value is the additional cost of holding the option for a longer period, which represents the uncertainty and risk associated with the underlying asset’s future price movements.
How does 0DTE work in options trading?
0DTE options are also known as “same-day expiration” or “day-of-expiration” options. They are traded with the expectation that the price of the underlying asset will move significantly in the very short term. For example, if an investor believes that a stock will make a large move up or down during the trading day, they may buy a 0DTE call or put option, respectively.
Because 0DTE options have no time value, they are less expensive than options with a longer expiration period, all other factors being equal. However, they are also more risky, as the price of the underlying asset can move against the investor’s position very quickly.
Why is 0DTE important?
The rise of 0DTE options has been driven by technological advances that allow for faster and more efficient trading, as well as by the growing popularity of day trading and other forms of short-term trading. 0DTE options can provide traders with the opportunity to make quick profits if they correctly predict the direction of the underlying asset’s price movement.
However, because 0DTE options are so volatile, they are not suitable for all investors. Traders who are new to options trading or who have a low risk tolerance may want to avoid 0DTE options and instead focus on longer-term options with more time value.
How are 0DTE options priced?
The price of a 0DTE option is based solely on the intrinsic value of the option, which is the difference between the strike price and the current price of the underlying asset. For example, if the current price of a stock is $50 and the strike price of a call option is $45, the intrinsic value of the option is $5. The price of the 0DTE option will be very close to the intrinsic value, as there is no time left for extrinsic or time value to be added.
Risks and benefits of trading 0DTE options
Trading 0DTE options can be a high-risk, high-reward proposition. The benefits of 0DTE options include the potential for quick profits and the ability to trade in a rapidly changing market. However, the risks are significant, including the possibility of losing the entire investment in a short period of time, as well as the potential for wide bid-ask spreads and low liquidity. Traders who are considering trading 0DTE options should be experienced, well-informed, and have a high tolerance for risk.
In conclusion, 0DTE options are a type of options contract that expires on the same day that it is traded, with no time value remaining. They can be an attractive option for experienced traders looking to make quick profits, but they are also very risky and not suitable for all investors. As with any investment, it is important to do your research and understand the risks before trading 0DTE options.