You likely have been hearing lots of talk about zero days to expiration options, commonly called 0DTE options. As the name implies, these options expire in one day. And as you might assume, this is a higher risk option play. (I recently was interviewed on Yahoo Finance about options and we spoke a bit about the topic here.)
0DTE options are high risk – tread carefully!
As a buyer, your goal with 0DTE options is to extract a return from the stock without having to pay much premium from time decay. As we know, time is the enemy of the buyer. With 0DTE, you don’t have to worry about time. Instead, you rely on the market or a short term momentum move to carry the option into a winning trade.
A successful 0DTE trade relies on a great deal of luck. Use highly discretionary funds for this style of trading or you could wipe out your account.
Here’s a trade example using Tesla
A favorite name of the 0DTE crowd is Tesla. This stock tends to move with volatility during the week, but it offers some interesting setups on expiration day, which is usually Friday. The stock has weekly options, so every Friday is an expiration day, making it THE day for 0DTE traders to start buying.
I often see big money flowing into options during the trading day. I look for isolated cases with Tesla and other names. Just this past week, Tesla was trading around 161.40 per share early Friday morning. When I witnessed a slew of 160 strike options trading that expired that day, I knew the 0DTE crowd was at it.
While these options had some intrinsic value (1.40 at the time), the options were selling a bit higher at 2.24. A 50% premium to intrinsic value may seem high, but this stock can move with the market in a big way. At one point during the session, Tesla reached 165. It closed at 164.3. If you bought early in the day and held on til the end of the trading session, you would have nearly doubled your money. Not bad!
But remember, this was a high risk trade. There was no guarantee it would work. You need to go in with the expectation that a trade will lose money – most of the 0DTE trades do. If you’re willing to risk multiple losses, a few nice wins here and there can juice up your overall portfolio returns.