Lately, there has been a lot of chatter about the abbreviation 0DTE. According to JP Morgan, the daily notional value of 0DTE options being traded has hit $1 trillion. For those who are unaware 0DTE refers to an options contract term which is 0 Days to Expiry. As you might know, every options contract comes with an expiration date. Whether it is a put option or a call option, every contract will expire on a certain day. So exactly what is a 0DTE option?

As its name suggests, a 0DTE option is one that expires in less than one day. This means the options contract is bought or sold and is set to expire during that same session. There are certain assets that allow you to trade 0DTE options, but most stocks and ETFs are on a weekly schedule of expiration dates. 

You might be thinking that 0DTE options seem riskier than a long-dated option. This would be absolutely correct. While some will argue that there is a successful and profitable way to trade 0DTE options, in the long run, the odds are likely going to be stacked against you. In this article, we will talk about what a 0DTE option is and how they are changing the stock market as we know it. 

What are 0DTE Options?

Let’s start with some basics. What is an option contact? An option contract gives the buyer the right but not the obligation to purchase an asset at a given price by a specific expiration date. They are financial derivatives that can be used as a way to trade assets by betting on their short-term or long-term price directions. 

There is no doubting the importance and utility of options. They are an excellent way to hedge your long-term portfolio holdings as well as a great source of income if you sell options to collect premiums. 

As for 0DTE options, many will say this is more of a gamble than a sure trading method. The imminent expiration of the contract means you need to be on the ball when it comes to the price action of the underlying asset. One move against you and you could leave yourself open to a wasted contract, or worse, getting assigned a huge order of shares. 

Can I Buy or Sell 0DTE Options?

Yes, you can buy or sell these depending on the strategy you are using. Some traders will use a strategy like the Wheel Strategy or selling covered calls. The former is a strategy where you sell put options until you get assigned those shares. At this point, you would then sell covered calls on the shares you own until they get assigned away again. In the end, you will pocket all of the premiums you earn as well as hopefully make a net profit on the shares you were assigned. 

Buying 0DTE options requires you to be correct on your bet on the asset’s price movement during the day. This strategy limits your losses to the premium you pay for the contract. Even if you are wrong, the only money you will lose is the premium paid. 

Selling 0DTE options can be a bit riskier, but can be a great strategy for collecting premiums. When you sell an option, you keep the premium paid by the buyer. You are then hoping that the price of the asset will stay within a certain range. If the contract expires worthless, you will not be assigned any of the underlying shares. If the price moves against you though, you could be stuck with at least 100 shares of the underlying asset. This is when it is critical that you have the capital or the margin to cover the cost of getting assigned. 

Are 0DTE Options Considered Day Trades?

FINRA does define the buying and selling of any asset as a day trade. This includes options contracts. If you are worried about the tax implications or being labelled as a day trader by the SEC, you might want to re-consider using 0DTE options as a strategy. In Canada, trading options can be a bit more expensive. There are few, if any, brokerages that provide free options trading. Most of the time, the cost of trading an option will be so high that it will negate much of the potential profit from selling 0DTE options in Canada. 

Can Trading 0DTE Options be Profitable?

Look, we’re not here to provide any financial advice. There are undoubtedly many traders who find trading 0DTE options a successful strategy. We aren’t saying that trading 0DTE options cannot be a profitable way to trade the market. What we are saying is that trading 0DTE options can be risky, especially if you are an inexperienced trader. 

Why Should I Trade Zero Days to Expiry Options?

Trading an options contract that is set to expire that day takes away something called premium decay. This is when the value of the option declines as the option approaches its expiration date. Why? There is less time for a trader to earn a profit. It is like holding a ticking time bomb in your portfolio!

With a 0DTE option, you don’t have to worry about premium decay. The option is about to expire that day so it takes out a lot of the time devaluation of the contract. 

Can I Trade 0DTE Options in My TFSA or RRSP?

Yes, as long as your TFSA or RRSP is set up to trade options contracts. You might need to get further approval from your brokerage if you don’t already have it. Be prepared though because most Canadian brokerages will charge you an arm and a leg to trade options. Make sure it is worth it for you, in the long run, to take on this strategy.

The Bottom Line: How 0DTE Options are Changing the Stock Market

If you have been following the financial news, you have most likely already heard of the increase in 0DTE options trading. What are 0DTE options? They are options contracts that expire within that same trading session. There is no overnight risk or premium decay, but there is the risk of the trade going against you in a short period of time.

With the large influx of trader interest in 0DTE options, some analysts are speculating about the potential repercussions. JPMorgan has called for a potential Volmageddon 2.0. This means that given the amount of 0DTE contracts that could expire in a single day, the losses of the overall market could be intensified substantially. The high volume of 0DTE contracts could be a sign that traders are taking a more speculative approach to trade the current market volatility.

Do we recommend trading 0DTE options? That is something you will have to determine based on your own risk tolerance and investment goals. Trading 0DTE options can be a valuable strategy to know, but always know the risks that are involved. If you really want to try trading 0DTE options, we recommend using a practice account first before trading with your own hard-earned money. 

Stay savvy!