Zero DTE Options Explained: Opportunities and Risks

[00:00] The world of zero DTE options trading is exploding right now as traders are seeing the opportunity of buying options and seeing two to 10x returns in a matter of minutes or hours. In this video, I want to explain what zero DTE

[00:13] options are, how they work, the opportunities that they present. I'm visualize the performance of these options so you can clearly see the opportunities and risks present with zero DTE options. So, what are zero DTE

[00:29] options? ZeroDTE options are option contracts with zero days to expiration. In the options trading world, DTE is short for days to expiration. And zero

[00:41] DTE just means that these options are expiring the same day. When we go down performance in the market as opposed to daily, weekly, or monthly performance.

[00:53] Why are zero DTE options so popular? First is that they are cheap. Longerterm options are much more expensive. So zerodt options are much more accessible for traders with small accounts. So for example, QQQ price uh as of today was

[01:09] $349.20 and I looked at the zero DTE 350 strike call. This call was trading for around $110, meaning the entry cost is $110.

[01:21] the 81day 350 strike call was trading for $16 or an entry cost of $1,600. So clearly we can see that these zero DTE or very short-term options are much

[01:33] cheaper and much more affordable than these longerterm options of the same type and strike price. The second reason zerodte options are so popular is that they move fast. They are extremely volatile. When the stock price moves,

[01:46] short-term options experience much larger price changes in percentage terms compared to longerterm options of the same type and strike price. So, I put this table here just just as an example. Let's say QQQ is at 350 and I put these

[02:01] estimated call price changes with a $1 change in QQQ. So, we have the 350 call price at the zero day expiration, 18-day and 81day expirations u that we talked about in the previous slide. And to keep things simple, we are just going to

[02:16] estimate that these options, since they are at the money, will change by about 50 cents for a $1 change in QQQ. That means that this $110 option, if it moves 50 with a $1 change in QQQ, that would represent a 45% change in the options

[02:32] contract price. If we go to the 18-day expiration cycle, that same $1 change in QQQ driving a 50cent change in the option results in a 7% plus or minus

[02:44] change in the options price. And then if we go to the 81day cycle, of course, we see that this 50cent change is a plus or minus 3% change in the options price. So these zero DTE options are extremely sensitive to changes in the stock price

[02:59] and that is why they can see such explosive price movements and it's also why they can see a vaporization of their prices when the price moves against them. Due to zero DTE options being so popular, they have extremely high

[03:13] liquidity which means they are very heavily traded. So this means that they will have very tight bid ask spreads and you'll have the ability to trade large contract quantities if you are a trader with a larger account. And I just pulled

[03:26] this up here from today. This was in the zero DTE cycle. And we can see that at various strike prices here the volume for these call options was in the tens to hundreds of thousands. So this 350 strike QQQ call today traded 213,000

[03:42] contracts which is absolutely massive. The next reason that I think zero DTE options are super popular is that you will end the day in cash if you are trading mostly zero DTE options. So, since you're closing your positions the

[03:55] same day, you're going to be cashing them out and you will have no overnight market risk. Let's go through some specific examples so you can visually see how sensitive zerodte options are to changes in the stock price. For these

[04:09] examples, we're going to be looking at spy options. This first example, we're looking at October 6th, 2023. On this trading day, SPY began the day around $422 and as we can see, just rocketed higher

[04:23] through the entire trading day, reaching a high price of 431 and ending right below 430. So, this was a really big move for SPY. And on the bottom part of this graph, we're looking at the call option with 0 days to expiration with a

[04:37] strike price of 422. We can see that this option opened with a price of around $120, let's call it, and reached a high price of $9 throughout the

[04:49] trading day. And this is because SPY had a massive run up and this call ended deep in the money and basically had a 9x increase in its price throughout this trading day. So, if you're on the right side of the trend with zero DTE options,

[05:02] you can make a lot of money. But, of course, it is not always going to work held it until that $9 mark. So, let's look at another option on this same

[05:14] trading day that saw some serious volatility in its price. In this example, we're looking at the same trading day, October 6, 2023, except this time, we're looking at the 430 strike calls. So, at the beginning of

[05:26] the day, SPY was a little bit below 422. And this 430 strike call was deep out of the money. And since it had hours until it expired, it started with a price near zero. But since spy started to rip higher early through the day and reached

[05:42] up to a price of 429 at around noon Eastern time, we can see that this option started to increase in value as its strike price got closer to at the money. The call's price went from basically zero or pennies on the dollar

[05:56] up to around 60 cents here. Then we saw it dip back here. And then at the high of the day when SPY was at 431, this 430 strike call reached a high price of $1.20. So it went from basically pennies on the dollar to um $1.20. This would

[06:12] have been a 100x trade. Obviously, any trader with good risk management would not be yoloing all their money into these 430 calls at the beginning of the but it's an example of how these options can see explosive growth in their

[06:28] prices. It is also an example of how quickly things can turn around. So from this high price where SPY was at 431 and this 430 strike call was in the money, we can see that its price went from a$120 all the way to zero in the last

[06:43] couple hours of the day because SPY went from 431 to just below 430. If you're addition to my 170 plus page options trading for beginners PDF, check the

[06:58] decay. And since we're trading options with literally hours until they expire, you can see the options decaying minuteby minute when you're trading these options. And here's a good example of how you can be right directionally on

[07:13] things to work out and the decay is just overwhelming your position. So, here we're looking at the 425 strike call options on October 5th, 2023. Here we

[07:26] can see SPY starts right around 424. And we can see that in the beginning of the trading day, SPY trades down to 42150 or 42160 or so and then retraces all the

[07:38] way up to 425, which is this call's strike price. But we can see over that same period where SPY went from 424 up to 425. We can see that this 425 strike call went from right around 90 down to around 60. So this call option lost 30%

[07:55] of its value over this period. even though SPY eventually did go up to 425 and increased from the initial entry point. So this is highlighting that if you buy zero DTE options and they are not in the money even if the stock price

[08:10] moves in your favor if it's over the course of most of the trading day most likely you are still going to lose money because these options decay so rapidly. Now that we've gone through these examples and due to their volatility, I

[08:22] go about thinking about managing zero DTE option positions. One benefit of trading zero DTE options is that they're cheap and so the average trader can buy

[08:35] more contracts as compared to longerterm options. And owning more contracts allows for more strategic and flexible trade management, which I'll talk about favor, it is very smart to start scaling out of the position. And here's exactly

[08:52] why. And here's an example. Let's say we start with 10 contracts at $1 a piece. This means we're going to start by paying $1,000 for this zero DTE option position. And let's say we set our stop loss initially at 30%, which means we're

[09:05] going to close these options if they fall to 70. Let's say we were correct in our entry point and the position is starting to move in our favor. Let's say we go up 20%. At this point, we could do

[09:18] something like sell half of our contracts or five of the contracts at $120, therefore collecting $600 back into our account. So, we're essentially removing 60% of our initial risk and we still have five contracts left. After we

[09:33] make this first scale out, we could move our stop loss higher or to break even. So for instance from.7 we could move our break even up to 90 cents or a dollar and this would reduce the risk on our position significantly. Now let's say

[09:48] after that the position continues moving in our favor and we get up to a 50% return on our contracts. At this point we could scale out even further and we could sell three contracts at $1.50 and this would collect another $450 back

[10:03] into our account leaving another two contracts remaining. At this point, we could move our stop loss up again and we could move the stop loss up to a 20% return from the initial price. So, since the contracts are now at a$150, we could

[10:17] move our stop-loss up to a$120. And therefore, if we go back to the $120 price, we will close the remainder of our contracts and we will close those for a 20% return. Also of note at this point is that we've taken all of our

[10:31] initial capital out of the trade plus $50 in profits. So, initially we paid $1,000 for these 10 contracts. And after these two scale outs, we've taken $1,50 back into our account, which means we've derisked the trade completely and put an

[10:47] additional $50 in our pocket. And we've also moved the stop loss up to $1.20. So, if we do sell these other contracts for $120, we'll take another $40 in P&L on this trade. So, the remaining two contracts can be held as runners or

[11:01] contracts that are held to push for bigger profits on this trade. Specifically, 100 plus% or more gains. And we can do this knowing that since we've already taken profits out of this trade and we've moved our stop-loss up

[11:14] to a 20% return on this second scale out, we can comfortably hold these runners, not feeling too greedy, pushing for this 100% profit mark on the important is because it derisks the trade significantly or entirely,

[11:31] allowing us to hold the remainder of the position stress-free. Next, I want to go over some stop-loss math just to give you a little bit more insight into why closing a portion of your position at profits is such a good idea. So, again,

[11:44] let's say we start with 10 contracts at $1, paying $1,000. Our initial stop loss is at 30% or closing these out at 70 each. Let's say the position goes up 20%, we sell five contracts for $1.20, taking $600 back into our account. We

[12:01] still have five contracts remaining. But since we closed half the position for a 20% gain, the remainder of the position could be closed for a 20% loss and the entire trade would break even. So this makes it so the trade can actually run

[12:16] against us further and we can still make money or break even on the trade. For example, if we sell five contracts at $120 or a 20% gain, then we will take in $600. But if the trade starts moving against us and then we sell the

[12:30] remainder of the contracts at 80 or a 20% loss from our entry point, then we will have taken a total of $1,000 into our account. Initially, we paid out a,000, so we make $0 on the trade. This means that if you close a portion of the

[12:45] trade for profits and then the position goes back to your entry price and you money on that trade. When it comes to zero DTE options trading, I think the

[12:57] management is super important because since they're so volatile, it would be very easy to see a profitable position turn into a losing trade. And so when position for profit, it's going to give you a lot more flexibility with managing

[13:12] the rest of the position. And it's also going to allow you to hold the remainder opportunities present with zerodt options trading, I want to talk about the primary risks. First and foremost is obviously since the volatility can work

[13:27] for you, the volatility can also work against you. as we saw in these past examples where the option prices went up huge but then went to zero just as quickly. So this is a type of trading where you are not risking a significant

[13:40] portion of your account in the trades. You are risking a very small portion of your account in each of these trades and you are managing them like I described in the previous slides so that you can derisk the position very quickly and you

[13:54] can hold the rest of the position very comfortably. The second primary risk is day. Literally, you are going to see the options decay. Especially if you enter a

[14:06] position and the stock price isn't moving for 15 or 30 minutes, you are losing value. The last thing I want to mention is psychological health and

[14:18] well-being. When you're trading weekly, quarterly, or yearly option strategies, in the market are not going to have as large of an impact on your P&L as

[14:30] compared to zero DTE options trading. And when you're trading zerodt options, you are trading minute-by-minute time frames, and that means you're getting a the market, especially when things are not going your way. So definitely keep

[14:47] an eye on your psychological health if you dabble with zero DTE options and if you're noticing any deterioration in your well-being, definitely take a step back and re-evaluate if zero DTE trading is suitable for you. I really hope you

[15:02] enjoyed this video. Leave me a comment down below. What do you think of zerodt options trading? Have you tried it? Have you had success with it? Let me know in the comments below as I'd love to hear from you. My name is Chris from Project

[15:14] Finance and I will see you all in the next