Zero DTE Strategies for Small Trading Accounts

[00:02] to talk about zero DTE strategies for small accounts for those that don't know I trade zero DTE literally every single day it's a big part of my book and in

[00:14] general I think they're very difficult to apply in smaller trading accounts but the goal of this video is to walk you through a little bit about the background of Zer DTE how it can make sense and then it give you some ideas on

[00:26] how it might be able to fit into your portfolio but it's a tight squeeze of this from the context of like a $110,000 account and under but ideally than that and you'll see why that matters so much so let's dive straight

[00:42] in and get to it so what are zero DTE options well they're essentially options that expire the same day so today's the 10th of September if I traded which I did zero DTE it means I trade options that are expiring the very same day

[00:55] that's all and what's the idea behind this well a lot of people think it's fast easy money which I guarantee you it is anything but that however there is a significant opportunity available in zero DTE options so here are a couple

[01:10] studies that you can take a look at this is called zero DTE trading rules and then this one is called retail Traders love zero DTE options but should they and these talk a bit about the phenomenon of zero DTE options and I'll

[01:23] explain exactly what this is and for those that are in the patreon you can download I have a file that kind of compiles SS all of these studies for e for everybody you can just look them up on ssrn so what's the profit mechanism

[01:37] for zero DTE options in this case I'm primarily looking at variance risk premiums what is that simply put it's the tendency for implied volatility to Trend over historic volatility I have a video that goes into zero DTE in detail

[01:54] an entire playlist but there's one specifically called Master zero DTE options that I'll share with you so that you can learn way more about the of that spend less time on the theoretical background and talk about

[02:08] the application so this is essentially Varian RIS premiums and what you'll notice is these yellow lines represent implied volatility which is forward historic volatility which is backwards looking and you'll notice that in

[02:21] general the yellow lines are above the white lines in general there will be periods that the white lines come above the yellow lines but it's not ways and you'll also notice some very specific qualities about the lines when it does

[02:34] that which we'll talk a little bit about more in detail so what's going on here again not to rehash the other videos but to get everybody level set this is simply the tendency for options to be priced too richly with respect to

[02:48] volatility compared to what the market ends up moving which again that's what historic volatility is so we're expecting in pricing in more movement than is actually happening and this this is very persistent again you can check

[03:02] out those studies not take my word for it I will always do my best to connect you with resources that you can look it for yourself and if we look back over a longer term time frame again you'll see that this is generally the case there

[03:14] take a close look at those periods because it's an important factor so that's in a nutshell what zero DTE options are all about so what's the signal exactly what we just talked about now that signal can be caused by event

[03:29] related things so maybe an fomc announcement is coming out and that's driving up volatility or just the overall Persistence of Varian or premiums which again is a documented phenomenon now one really important

[03:41] admin note here is for people that sell volatility very often hear the idea of you know we sell V when it's high and buy when it's low that's actually not exactly correct it's kind of a a simple way to create a rule of thumb but it's

[03:55] not representative and I'll show you what that means really the signal and what matters in this case what we're measuring is IV over HV this can happen if implied volatility is high or this can happen if implied volatility is low

[04:09] and I'll show that to you so if we take a look at this period here we can see over the past year which this is what's showing you again that's what the that this is actually the highest period of volatility over the past year for

[04:24] short-term V and then for 30-day V it's the second highest compared to this period over here so volatility on a relative basis is very very high in the instance yet realized volatility or historic volatility is even higher so

[04:37] this is an example where if you sold volatility when it's high it didn't matter because you still got beat out by price so again the important is the relationship between implied and historic that's actually what these

[04:51] purple lines plot for us I can get rid of all these yellow lines and just have charting the difference for the same time frames between and again for those download available in the shop that's free for all patreon members that has

[05:05] this very thing script for you it's one that as you could tell I I use all the time because it helps me visualize this so that's the signal now when it comes to capturing I'm going to use things like short options I use short strangles

[05:18] or short straddles but that's not going to work for small accounts because if you are on a regulation te account it's going to be probably hundreds of thousands of dollars if you want to sell a $20 Delta short strangle for example

[05:31] in SPX so then we have to think about and for those that are curious in a portfolio margin account it's like $75,000 so that's going to be heavy for most smaller Traders so then how can we think about a way to run this approach

[05:46] well I back tested it for us so that we have some data that we can look at again the way that I do this is ideally built on a process that's deployed long term so that's why back testing something

[05:58] like this it actually doesn't involve a lot of discretion it's kind of generally running the strategy and that's why you'll notice I have this concept of occurrence-based and careful discretion because I am still discretionary there

[06:10] are certain conditions that based on my personal strategy will lead me to enter or not enter or delay an entry but you have to be so careful about it because the performance of all this this specific kind of strategy it's kind of

[06:22] an aggregate numbers sort of thing as you have more and more occurrences the output will approximate toward WS the value of the strategy so if you start cutting too many occurrences because of discretion that's skewed in some way

[06:35] that will drastically impact your results so using discretion is completely okay but you have to very carefully track it so that you're not killing the output of the system so let's take a look at a couple studies

[06:47] again the other videos in the playlist have huge study sets on this so I'm points I already know based on my studies that the better entry times are later in the day so this is looking at Eastern St or time essentially 1330 or

[07:01] 1400 entry periods tend to be best so I carry that through the study this is just looking at short calls Deltas long call short putut long put Deltas the lot two lot and then these are all going to be zero DTE there's no Max profit

[07:17] stop- loss applied and again this is based on what I've seen previously that increase the performance you can again go back to the playlist that I this super far detail so this is looking at a 10 Delta strangle 15 Delta strangle

[07:32] 10 Delta strangle 15 Delta strangle at 1330 1400 respectively and you can see strategies the reason why I show you the difference in a half hour between these is to show General robustness around the time frame then I take a look at adding

[07:47] wings so I have a 10 15 strangle but I'm buying the five Delta wings for both I do that at 1330 and then 1400 you could see at 1330 it does not do well you can

[07:59] one important difference here though take a look at the width of the spread 5 Points versus 10 points take a look at the change in p&l it's much much much higher performing at the wider spread with no p&l management applied then when

[08:14] we take a look at 1400 which is again I'm just picking a time period I'm not trying to optimize it heavily I'm just trying to show you a concept so if we take a look at 10 Delta 15 Delta again doing the entry at 1400 notice that the

[08:28] doing the entry at 1400 notice that the performance increases massively for the kind of wider iron Condors well really for this but again take a look at the impact of performance so the first takeaway you can grab from here is that

[08:41] wider is better now this is going to be dependent on what your account can afford because if you're doing something like a 15 Delta and five Delta we can look at it together really quick let's grab I'll use a one DTE it's not going

[08:54] to matter because it's a defined risk trade but let's sell this 15 Delta and buy the five and then let's do the same thing on this side we'll sell the closest to 15 and then we'll buy the five and then let's take a look at what

[09:08] that grabs us for margin requirement it's four grand so even if you have a smaller account again if you have a $5,000 account this is now your entire dangerous and the other problem you have is if you have a $5,000 account you're

[09:21] risking 3265 which is way too much so you might have to start playing and that's why I show you with a stop loss and you actually notice it really improves the performance of the strategy for both now

[09:34] a really important note this is in a frictionless environment this is not including fees this is not including spread which would absolutely chew these to Pieces the performance for all of these will contract meaningfully so one

[09:47] of the ideas is to decrease occurrences number of Trades it's to decrease the number of legs as much as possible and we want to try and touch the trade as little as possible once it's on because fees are quite detrimental now the last

[10:00] thing I wanted to show you however is that the 10o yde 20 Delta did not perform quite as well it had a decent win rate but still underperformed but win rate but still underperformed but again the 20 Delta 5 Delta without

[10:13] profit management absolutely crushed the 15 Delta 5 Delta without profit management so there's absolutely an important argument to be made for managing profit on the iron Condors or the spreads that are being used but

[10:28] environment that includes fees and transaction costs there is absolutely a about a couple other things really quickly I want to highlight this path dependence and I actually asked you to pay attention to this earlier path

[10:43] dependence is essentially one of the properties you'll find in returns in general and volatility really amplifies it cuz volatility does This Thing Called cluster where when it goes through a transition it tends to hang out in a new

[10:55] place for a little while before it transitions again so if we take a look at short-term volatility which is the white line and the bright yellow line you'll notice that when it's breached it tends to be breached for a few days

[11:08] before it comes back down so for example in this case uh December 20th it was still okay with slight vrp then on the 21st we actually turn negative then if

[11:20] we go to the 22nd we're still negative if we go to the 26th we're negative go to the 27th we're coming back to break even so what I'm highlighting in this instance is for me if I get stopped out and I

[11:34] know that volatility is starting to expand I actually might not Place some trades on additional that's the discretionary portion because I know infrequent that you'll see where this white L like this here where historic

[11:48] volatility exceeds implied and it's only for a day it's infrequent that I see that so a lot of the times when I'm trading variance risk premiums I will wait until historic volatility on a short-term time time frame is less than

[12:00] implied volatility because again if you just do it at nauseum completely indiscretion you'll get these results which are still good you can optimize them a little bit so zero GTE for beginners and specifically small

[12:13] accounts I think that they absolutely can be applied but they have to be very very very carefully used because for example even if you have a $10,000 and you're like wow that's pretty good $49,000 return on a two lot well here's

[12:28] the problem the loss is $650 so even if you have a $10,000 account that's way too big of a loss on an individual trade because these again are path dependent

[12:40] and you need a number of occurrences in order for the returns to approximate so if you have a $10,000 account you might actually have to look at a slightly suboptimal 10 and five wide so that your max loss is now contained to 860 bucks

[12:56] little bit too high you might have to be even tighter than that so the main issue that small accounts are going to find when trading something like this is the ability to put on something that is logical that makes a decent return that

[13:11] still captures the benefit of what the structure is and what the profit mechanism is without giving up too much profit in order to reduce Max risk going to run into now the last thing I want to highlight is for me if I'm going

[13:25] to let them go into expiration it has to be European style option if it's not European style options then you have the risk of assignment and that opens a big problem the other benefit to using something like SPX as compared to other

[13:40] products you can use something like xxxp which is slightly smaller it's going to be less liquid and the problems you're going to face in this in terms of spreads are going to be exacerbated but it's also doable but the other benefit

[13:52] you get is section 1256 of the tax code where 60% of the gains are going to be longterm and 40% will be short ter which will be at your rate the last note is that when it starts to suck is when it's important to keep doing the strategy

[14:06] because the way that this works if you follow the math on your average win it's $200 for I'm just picking this 10 Delta here randomly your average loss is 465 so as soon as you have one loss it's at least wiped out two wins and again

[14:20] probably would be a little bit worse than that if we're looking at the spreads it's even worse still if we're looking at the $10 short s $5 Longs you looking at the $10 short s $5 Longs you have $107 average win with $220 average

[14:35] loss not terrible but then if you're doing the 15 and fives 220 average win 714 average loss so really really difficult to make these up without giving yourself enough Runway to get enough occurrences on so another thing

[14:48] that I like to look at and I can look at in a future study if we' want is the uh propensity for average losing streaks so that you have an idea of what that looks like I use that pretty heavily in all of mine my strategy so that I can at least

[15:01] have an understanding of what is likely to occur it's not limited to that you gives me some ideas so it doesn't feel like I'm flying quite blind so hope the video is useful specifically zert options for small accounts it's a tricky

[15:14] Prospect but can be done SPX again is the preferable tool in my opinion but something like XSP is also viable and it will trade at a tenth the size as SPX it will give you similar performance

[15:27] overall to what I just showed the difference is the spreads will be worse so your actual performance will be a little bit different but otherwise the applies all the same as always any questions let me know be an outlier I'll

[15:40] questions let me know be an outlier I'll see you all later