Zero-Day Options (0DTE): What They Are, Risks

Many traders try to profit from short-term swings in the stock market by buying call options or put options, rather than buying the underlying stocks themselves.

Some investors use options as insurance against unexpected market movements (for example, selling covered calls on a stock they own), or buy call options to get exposure to a stock for less than the cost of its shares.

But other traders use options for high-risk, high-reward speculation. Recently, an especially-risky type of options trading strategy has become popular among speculators: zero-day options, also known as 0DTE options.

What are 0DTE options?

Zero-day options are normal options — puts and calls — that expire in less than one day, hence the “0DTE” nickname (short for “zero days to expiration”).

Typically, traders buy options well in advance of their expiration date. A trader might buy call options, and then wait for positive investor sentiment or good news (such as a favorable earnings report) to increase the price of the underlying stock, so that they can resell or exercise the calls for a profit before expiration.

But 0DTE option traders buy options on the day they expire, in the hopes that they can quickly profit from a last-minute swing in price.

Why has zero-day options trading become popular recently?

According to researchers at the Johns Hopkins Carey Business School, the volume of 0DTE options on S&P 500 stocks has more than doubled since 2021, and now accounts for more than 43% of the total daily options volume on those stocks ^[0]

Some of the reasons for the growing popularity of zero-day options include:

• Low premiums: 0DTE options are often cheaper to buy than longer-dated options because time-to-expiration is a variable that affects option pricing. (More on that below.)

• Quick turnaround: Zero-day option trades, by definition, are opened and closed in a single day. That may appeal to traders who want to see fast results, and don’t like monitoring their investments over time.

• Availability of daily 0DTE options on some indexes: Since 2022, the Chicago Board Options Exchange (CBOE) has increased the number and type of options available on the S&P 500 index and Nasdaq 100 index such that there are now options on these indexes expiring every trading day. That has made 0DTE trading available daily.

What are some of the risks of 0DTE options?

There are reasons why zero-day options have become popular, but there are also reasons to be wary of their popularity. Zero-day options often come with outsize risks, even compared to normal options. These include:

• Losing your entire investment: 100% losses are a potential risk of any options purchase, as options that are not profitable at their expiration date tend to expire worthless. But while normal options traders can watch the market in the days or weeks leading up to expiration and adjust for unexpected developments, zero-day options traders are making everything-or-nothing bets on expiration day. That means 100% losses are harder to avoid.

• Time decay: There are several variables that affect the price of an option. The price of the underlying stock matters, but so does the time left until expiration. An option’s value generally decreases as it nears expiration; this is referred to as “time decay” or “theta decay.” Without a favorable last-minute move in the underlying stock’s price, the price of many 0DTE options will approach zero throughout the trading day due to time decay. This is why zero-day options tend to have relatively low premiums.

• Feedback effects: The rising popularity of 0DTE options could amplify expiration-day price swings, which itself would increase the potential risk and reward of 0DTE options trading.

It’s worth noting that financial advisors generally don’t recommend risky options trading strategies for most people. They’re more likely to recommend a long-term, low-maintenance approach to investing, such as dollar-cost averaging into index funds.

If you’re already investing for the long term, and you have extra money that you want to try zero-day options trading with, just be careful: Understand that you’re making an all-or-nothing bet, and that you’ll win or lose that bet in less than a single trading day.