What Are 0DTE Options?
Zero-day options, or 0DTE options, are contracts that expire within a single trading day. Traders often use them to speculate on rapid price swings in the market. Unlike traditional options, which are typically bought well before expiration, 0DTE options are purchased on the day they expire, offering a quick turnaround for potential profit.
Why Are 0DTE Options Gaining Popularity?
The use of 0DTE options has grown significantly, now making up over 43% of daily options volume on S&P 500 stocks, according to Johns Hopkins researchers. Key reasons include:
- Lower premiums due to minimal time to expiration.
- Fast results, as trades conclude within the same day.
- Daily availability on major indexes like the S&P 500 and Nasdaq 100, thanks to expanded offerings by the CBOE.
Risks Associated With 0DTE Options
While appealing to some, 0DTE options carry considerable risks:
- Total loss of investment is more likely since these options can expire worthless.
- Time decay, or the rapid decrease in value as expiration nears, impacts 0DTE options significantly.
- Market feedback effects could amplify volatility on expiration days, increasing risks.
Should You Trade 0DTE Options?
Financial advisors typically discourage risky strategies like 0DTE trading, favoring long-term investments in diversified index funds. However, if you choose to trade 0DTE options, understand the high-stakes nature of these trades and proceed cautiously.
Note: Always ensure your core investments align with long-term financial goals before exploring speculative strategies like zero-day options.
