AI Summary
This video analyzes the risk and reward of trading zero days to expiration (0DTE) options on SPY at different times of the day. The study compares the percentage change in straddle and strangle premiums for one and two dollar moves in SPY, recorded at the open, 12 PM, and 2 PM. Key findings show that as expiration approaches, option exposure amplifies exponentially, making late-day selling extremely risky and late-day buying potentially rewarding but difficult to time.
Full Transcript
[00:00] for the market measure we do zero DT options so trading zero DT options carries the greatest risk return of any option expiration cycle but with some
[00:14] few hours of the day to place our zero DT trades did somebody asked this question and say didn't somebody call in and say well we haven't got any call-ins
[00:26] today no I said didn't somebody call in yesterday and ask a question about trading in the last hour we haven't looked at like placing trades in less hours so what happens if we wait
[00:39] until the last few hours the day to place a zero DT trade let's take a look so we went through and we looked at spy we compared the exposure of the zero DT
[00:51] straddle and strangle one dollar wide from at the money on each side because the um the SPX we're talking about just the last hour and placed at the
[01:03] following points in a day at the opening three hours to expiration and one hour to expiration we recorded the immediate effect of the one and two dollar moves on spy on the option positions as a percent of premium and that is the
[01:19] at a a dollar and a half a dollar uh expected move in a one day in spy let's take a look at the next slide
[01:34] study was done with option prices recorded with an average implied volatility of 15 in the spy in order to reflect the current implied volatility so we went back and we just took all the times when we could find and implied
[01:49] volatility around we have now let's go to the next slide so when implied volatility is below average like it is now like just like 40 percent of the strata premium Remains by 2 pm and 16 percent of the strangle
[02:09] premium remains okay so we're just giving we're throwing out some numbers here because people you you'd be surprised we get a crazy number of questions just about this stuff so at 8 30 in the morning the Stroud's a dollar
[02:22] seventy nine this is in the spy in zero DT 7.79 and the one dollar wide strangle is a buck 12 it's 108 and 38 and a two it's 75 cents and 16 cents because it's hard to
[02:37] move ten dollars in the last hour sure or or in ten dollars in the in the in the futures or one dollar in the spies those numbers surprise you at all no
[02:49] implied volatility is 15 for the purpose of this study it normally if implied volatility is let's say 22 or 23 those numbers are about double right it's it's
[03:02] cheap let's go uh that's why the butterflies so if the Spy moves one dollar at the open you'll see a roughly 10 change in the price of the Spy and in the straddle and the strangle at
[03:16] 2 pm a one dollar move causes a 53 percent change in the straddle and a 1.5 percent change um in the strangle so basically what they're saying here is and this is only on zero dtes again we're talking about
[03:31] buck this is the opposite of like selling premium this is how do you get dollar move you make nine and eleven nine and twelve percent at 12 o'clock
[03:46] it's 39 and 84 and at 2 p.m it's 53 and 156. if you can time those last hour moves which which nobody can but if you can that's that's how much bang you get
[04:00] your lawn premium is worth twelve percent a one dollar move in the afternoon late it's worth 156 percent in the right direction yeah in the right so does that does that is that compelling for you for trading late in
[04:18] the day no no it's more compelling it's absolutely only going to lose 12 if you're wrong and if you're off by ten dollars you
[04:31] only cost you 12 but in the afternoon it costs you 156 through this reward anything after 12 o'clock if you're a buyer you're buying everything after 12 o'clock a two dollars moving the Spy gets even
[04:48] more exponential by 2 P.M but it causes a 40 to 60 change in options at the opening but up to six times changes in the last hour so just look at this if you had a two dollar move this is what we this is why we say
[05:02] you shouldn't sell premium in uh in the last hour or two um because the risk rewards is not there you can only make X but you can lose 600 times if there's a if there's a you know a two dollar move
[05:15] which is a 20 move which happens a couple times a year in a straddle it's 172 percent and in a strangle it's 569 percent crazy this is why we don't do anything after 12 o'clock this is why we do everything early in the day or with
[05:29] huge move a 20 move only moves to straddle by 38 percent of the strangle by 59 which is which is manageable but 600 or 250 is really tough
[05:43] let's go to the next slide so despite low realized volatility for the last couple of months all except one day saw high to low ranges above two dollars the result of this study will be
[05:58] observed most the results of the study will be reserved most of the time so we have about a two dollar move now it doesn't mean it happens in the last hour
[06:10] but you are getting a two dollar move so it's not ridiculous you know we talk about the reason we do a 30 hour wide strangers most days we have a 30 move and today we didn't so far today has been really narrow in the in the Russell
[06:23] we've had a one percent move in the NASDAQ we've had a one percent move but in the S P's none and this is s p study um let's go next slide
[06:38] so some of the takeaways as a zero DT options as the zero DT options March closer to the three percent three PM expiration the exposure amplifies exponentially at the open a one or two dollar move in
[06:52] the Spy can cause a 10 to 40 percent change in zero TT options and at 2 pm you can see those options fluctuate between 50 and 560 percent as a percentage of their premium for the same dollar move in the underlying so if you
[07:07] it's going to be much more difficult on a risk reward basis to sell premium late in the day correct if I'm making an assessment of risk reward know that you can have a lot more risk you don't You cover by noon
[07:25] doing this you're going to reduce your size right if you look at the cell pretty small in this stuff so you cover by noon okay okay and if you're looking to get directional do you think in the afternoon it's the best shot to be if
[07:40] going lower on the close um and you want to take a shot you're way we Trail time you're better off doing it with one DTE or zero DT but for
[07:54] the first couple of hours only let's say a quick 90 seconds tastytrade brokerage firm with Mr Scott Sheridan next