Can You Actually Be Profitable Trading 0 DTE Options?

[00:02] been bitten by the bug right I have decided to finally trade zero DTE options right right now zero DT options are the craze everybody's talking about it a lot of people on YouTube are trading it so you know I decided to take

[00:18] the plunge and just find out what all this craze about and I just decided to trade zero DT options to see for myself is there really you know if there really was something there right so for the most part I was very hesitant to trade

[00:33] zero DT options I was hesitant I was reluctant I was very resistant and the main reason why I was very reluctant to trade zero DT options is because of the edge right so let me explain a little bit more so when

[00:48] understand where is our Edge right if there's no Edge there's no reason why we should actually be trading the vehicle so when you are selling options this is where our Edge comes and the edge comes basically from the fact that the implied

[01:02] volatility is greater than the realized volatility right it overstates you realize volatility a lot of the time so what this means is that the expected move is greater than the actual realized move so this table down here is a study

[01:16] done by the folks at tastytrade so what they have done on this studies is to see whether the expected move right the theoretical uh probability of win matches the actual win results right when it's actually brought to live

[01:30] trading so you can see down here the theoretical win when you trade the expected move right roughly it's either using you know the expected move formula or the 16 Delta options basically the theoretical is 68 right but as you can

[01:44] see the actual occurrences which is basically the actual results it's actually much higher than 68 right it's somewhere from 71 all the way to 85 which means to say whatever you're seeing on the risk profile right the

[01:58] theoretical win which you see is usually understated right that means your actual gives you the edge that's why you're going to be profitable over the long run team the tasty trade folks you can see down

[02:13] here this is on spy the index ETF you can see that regardless of the volatility right the expected move is always greater than the average realized matter what the volatility is the volatility could be low the volatility

[02:27] right also could be high right in all cases you can see that the expected move is much greater than the realized move and that is why we have an edge as an option seller right when we sell options so what it means on the chart is this

[02:40] right so for example if you were to take a look at the 16 Delta options or the expected move range which you can see on your option chain what it will show that stock down here you'll see that the expected move is like this so based on

[02:54] the time frame let's say for example in the next 50 days right let's say this is the 50 days to expiration left for the options it says that the expected range will be somewhere down here but in actual fact right after the move has

[03:08] already happened the realized move this is actually the actual move right so this is based on a 68 probability of profit right so that means it's trying to say 68 of time it will actually be in this range but in actual fact the 68

[03:21] range is down here so what about the range all the way to the actual supposed expected range which means to say this number is much higher and that is how you get the 71 to 85 percent right so this is our Edge now this is all Theory

[03:38] right it's very nice right I mean it's saying that you know this is the theory based on this Statistics which they say that it's going to be much higher but what about in terms of practical terms right so what I did is that I put out

[03:52] the last 100 trades which I had for this triangle so what other better way you can actually trade the expected move than the vanilla strangle right so the strangle is the cleanest way the purest way for you to trade the expected move

[04:05] right so roughly 16 Deltas on both sides right you have a shot put and you have a short call so I took the last 100 trades and the theoretical win rate as you can see is supposed to be 68 right so if you were to take 16 Deltas on both sides

[04:20] it's supposed to be 68 probability of wind but as you can see the actual win rate which I've gotten is 77 right so this is based on actual trades rather

[04:32] than Theory right so you can see this is how it panned out in actual trades so the actual win rate is 77 loss rate is 23 and it all pans out to a profit at the end so that is why when we are trading options when we are selling

[04:46] strangle for me is a bread and butter strategy right so that is why I lean on it a lot when I want to trade the expected move so you might be wondering

[04:58] right now so it seems that there's the edge down here right so that means when you trade zero DTE options that's going to be this Edge as well right that means the actual win rate is going to be much higher than the theoretical win rate

[05:10] which means say if you trade zero DTE you're going to realize your profits much quicker you know every single day you put on the trade you're gonna have a know that over the long run you're gonna be profitable so is that actually true

[05:24] be profitable so is that actually true I'm not too sure right and the reason is because of this right so the problem with 0 DTE comes down to whether the expected move is actually greater than the realized move so you can see again

[05:37] this is a study done by the tasty trade team you can see the study has gone all the way back since 1993 so there is a lot of data down here right so this is a very significant data set which we are looking at down here so this is on the

[05:50] spiders you can see that if you were to use the 45 days all the way to 90 days you can see that you know in this time frame right pretty much it means that if you use the 45 DTE all the way to 90 DTE you can see that this expected move is

[06:05] greater than the actual realized move so in this time frame you're going to see that you're going to win more than the theoretical win rate right so you can see 45 to 90 days and that is generally why I want to stick to

[06:17] 40 to 60 days whenever I'm trading you know the the options this is the time where the Theta is good if you go a little bit more to 90 days although the edge or rather the expected move is much greater than the average realized move

[06:30] you can see down here is a two percent difference whereas for 45 days you know it's only only a point five percent right so it's much more pronounced the edge as more days goes out right but the thing is that you know when you're

[06:43] trading the options the Theta Decay is most Optimum roughly around this time frame so generally I go for around 40 to 60 days now what about 0 DTE right so done the research and you can see that

[06:57] anywhere from 30 days all the way to seven days and Below basically under 30 days your expected move is actually lesser than your realized move which means to say if you were to go back to the Chart down here all right let me

[07:11] just remove all these drawings the expected theoretical moves is this but the actual move could actually be greater right so it's actually much bigger so that means you're looking at a range of somewhere from here to here

[07:23] which means to say if the theoretical move says you're going to win 68 percent bigger move than expected move it means you're going to actually lose more than what it says down here that means you win 68 of the time the chances are that

[07:37] you're going to win lesser than 68 of the time so suddenly now you have a Negative Edge right you can see down here the a realized move is more than the expected move so when I saw this data set quite some time ago that is why

[07:50] I was very hesitant to trade you know the weekly options or anything that's under 30 days right people have asked can you trade this on the weekly options which are shared on the weekly options the answer is yes you can trade them but

[08:04] right it's not very clear down there unless you have some sort of a very strong long directional bias you are good at picking directions then yes you can overcome this Negative Edge and you'll be profitable in the long run but

[08:18] if you want to trade something like the the iron Condor the strangle where it you know you only profit if it stays within expect a move then it's going to be a question mark right whether zero DTE is going to be profitable but with

[08:31] trade team they have come up a lot of research with zero DT as well to see you know how you can profit from there I decided to take the plunge try it out for myself to see whether it's really profitable and the results were actually

[08:45] not something that I actually expected right so the first thing that I was faced with is choosing a zero DTE training strategy by the way if you like this video so far Please Subscribe and also click the thumbs up button and also

[08:58] do get your free copy of the options income blueprint where I share the top three options strategies that help you generate a consistent income each month trading just one to two hours a day right so if you want to go ahead to get

[09:10] this copy just head on over to optionswithdavis.com blueprint or right different ways that people are trading zero DT options right the many different ways so first of all this is not the one

[09:22] you know the the end-all and BR of the the strategy that I'm going to be trading in a sense whereby don't use my results to say that all right ZD 0dt options work or don't work right there are many different strategies So based

[09:35] see that they they have the long call the long put right they're just buying an option outright just a very directional basis and then you have just to collect extrinsic value because the idea here is that you know the last

[09:50] day the Theta is going to be the highest you're going to really Decay a lot of the value so the thought of selling naked calls and puts the other way is by trading butterflies iron flies butterflies is more of directional where

[10:02] you choose either you know the market is going to go up or go down iron fly is more neutral right just at this right smack at the money uh options right and probably I think the most popular one which I see a lot of people on YouTube

[10:17] are actually talking about it right credit spreads you pick the direction and then they manage it somewhere you know intraday and they take many trades throughout the day and the final one is the iron Condor right the iron Condor

[10:29] basically just manages or brother is trading the expected move so when I choose this strategy I have a few criteria so the first criteria is that I want to avoid selling naked options because the gamma is at its highest at

[10:44] zero DTE right gamma is a very uh it's detriment to you if you are selling options with an option seller because a big move right any move is going to negate a lot of the Theta that you're gonna gain right so it's very dangerous

[10:57] to sell Naked options because you could lose a lot of money so that means the strangle is out of the question and any naked calls or puts will be out of the question as well next I want a strategy that was simple to execute with zero

[11:10] management right I just want to put the trade once leave it to expiration and it's pretty much like a set and forget strategy right mainly because I do not want a strategy where I can just put out once you know I just go and do my all

[11:25] other stuff right I don't have to monitor the the market all the way until the market closes right and if you have a full-time job right this will be the right just put it on and then you go ahead with your day at the end of the

[11:38] see whether it's a profit or loss and I want one which is relatively high probability of profit without being directional and a lot of people lose money trading you know in general right bid options or outright trading is by

[11:52] proprietary training firm and the way the firms really trade isn't really directional right they trade a very neutral style of trading like spreading or Market making where there's not much in terms of direction right so if you

[12:06] want to be directional you can but it's going to be a very difficult Journey for you to be profitable unless you're very good at technical reading charts and all that so the strategy that I've chosen is to truly expect the move using the I

[12:19] iron Condor right the iron Contour strategy and I want it to be on the SPX right SPX because it is a European style options that is Cash settle that means there is no early assignment risk with that said here are the trade mechanics

[12:34] right of this strategy which I put on so I put on the iron Condor they will be in the first few hours of the market open I won't be there to watch it until the market close so uh the Deltas we are chosen is somewhere from 15 to 25 Deltas

[12:47] for the short strike so the win rate is approximately 60 to 65 percent that's the theoretical win rate and then the five dollar width of the wings so the maximum loss is pretty much 500 minus the credit received right so this way I

[13:03] really you know just trade a small amount it's a very small size I won't get hurt that badly if it goes wrong and I'm just going to hold it all the way to expiration so this is the strategy I went forward in terms of 0 DTE so here

[13:17] are the results so the results I must say are actually pretty surprising right say are actually pretty surprising right at least mildly surprising uh in in the actually in a profit I wasn't actually expecting a profit I was expecting maybe

[13:33] kind of a loss but in the end it turned out to be a slight profit although it's not going to be something big right so here are the statistics right the statistics is that the win rate is same 3.33 and that is why I say it's

[13:46] surprising right mildly surprising because uh theoretical win rate is 60 to 65 so this is much higher than 60 to 65 percent and remember previously when I expect that the win rate gonna be that high right I expected that the win rate

[14:02] is going to match whatever the theoretical win rate is but in the end at the end of the day right yeah the average win average loss and the average win average loss and the expectancy is a positive one so does

[14:15] this mean that the zero DTE options or at least this strategy is going to be profitable in the long run well the answer right now I have for you is still a question mark right so the reason is because you see one loss is

[14:29] loss is going to wipe up any profits which I have already gained so at this point of time it's still a little bit uncertain although it is quite promising at this stage in time right and the reason why it's still a question mark is

[14:43] because you need to understand how we can achieve the true probability of any trading strategy that we put on so let's say for example if you were to flip an unbiased coin 10 times right a coin we know is 50 hits 50

[14:56] Tails so if you were to just flip it 10 times is it possible to get 7 hits and it's definitely possible you could have seven hit three tails even eight hits or even dying hits right maybe you know somehow you're very lucky but what if

[15:11] you flip the unbiased coins a thousand times is it possible for you to get 700 times is it possible for you to get 700 hits sorry 700 hits and 300 Tails well the chances are very very unlikely unless it is a biased coin so you can

[15:25] see down here this is the graph of how it looks like when it when it comes to probability right you can see that when your sample size is very small let's say somewhere around 15 trades right you can see I have 15 trades So based on 15

[15:40] were to just you know flip the coin 15 times you might be led to believe that this coin is biased that this coin have you know seven times you can be on the hits side three times on the tail side right but if you start to get more

[15:54] sample size you start to flip the coin more and more you notice that it will eventually go to the mean and it will hover around the 50 which is where the true probability is and this is very true and the same for your

[16:08] trading strategies when it comes to training options as well so this is the they did is they went to take a look at an 80 win rate strategy so they want to see how many sample sizes how many occurrences you need to have in order

[16:24] for you to reach the true probability so in a sense you can see that you know you right if you have a small sample size let's say for example around 15 right later to believe that you know you have a 90 win rate or on the other side you

[16:40] might think that there's only a 60 win rate and you discard the strategy altogether right but in order for you to understand whether this the strategy is long term whether you know the win rate what is the true win rate you need to be

[16:55] the moment right now the sample size which I have is still very small there's which I have is still very small there's only 15 trades that I put on and this is so so uh it's still a question mark but I

[17:10] right it's a little bit promising and I'll still continue to prone the streets and see whether there is something uh to really trade on for the zero DT whether we do have an edge to use this strategy so whatever option strategies you want

[17:24] to put on it's important for you to have a pretty large sample size for you to really know whether it's going to be profitable in the long term all right guys so this is the zero DT iron Condor on SPX strategy so the question is are

[17:39] you going to trade the zero DTE options let me know in the comments below by the way if you like this video then you're absolutely going to love this next video watch that video right now also if you haven't already gotten your free copy of

[17:53] the options income blueprint you can do so just by clicking this link down here on your screen and you'll be able to get it for free all right I will see you in it for free all right I will see you in the next video