June 2023

0DTE Options Primer: What Investors Should Know About Expiration-Day Positions

Summary

Zero-days to expiration options, or 0DTE options, are not new
0DTE options are simply listed options that have reached their expiration date – eventually every option expires
As expirations have become a daily event for some products, the availability of 0DTE options has naturally increased
0DTE options have less than one full trading day before they expire

The options market is a dynamic ecosystem and has evolved over the decades to provide a variety of products that may be used in numerous strategies, from the simple to the complex.

Recently, a concept that has generated many conversations is the zero-days to expiration, or 0DTE, option. 0DTE options are not a new product, nor are they a new strategy. Despite what the moniker may suggest, 0DTE options are rarely listed on the morning of expiration. Rather, they are likely options that have been listed for days, weeks or even months, and like all options once they reach their expiration date, they have zero days left till expiration.

The reason these options are described as 0DTE is simple: They have reached the end of their lifecycle. This truth eventually arrives for all options. In essence, every option will become a 0DTE option on its last day – conceptually, for 0DTE options, what is most relevant is the expiration.

The escalated discussion around 0DTE options stems from the potential impact they may have on markets. As with option products themselves, expiration cycles have changed since listed options began trading in the United States in 1973. The most profound change in option trading has been the concept of daily options on certain underlyings and the daily expirations that accompany them.

Some investors may refer colloquially to 0DTE options as "dailies," though again, they are not an official product. For some investors, the availability of daily expirations has allowed them to make one-day, targeted trades. In some cases, this additional availability has allowed for increased flexibility when attempting to mitigate perceived risk that may be event-driven and thus carry an increasingly granular time horizon.

For more information, view or download the Options Expiration Calendar

Potential risks and rewards with 0DTE options can be similar to those of options that are not as close to expiration. For instance:

Writers of 0DTE options could be adversely affected by an increase in implied volatility, while buyers may benefit
Theta (or time decay) is generally considered to be a favorable function for sellers of options and unfavorable to buyers
Due to the risk profile of expiring options, large moves in the underlying can yield significant losses over a short period of time for sellers of 0DTE options
As with any option trade, buyers of 0DTE options have a defined risk profile, which includes the potential to lose up to the total amount paid for the option

With any investing strategy that involves leverage, investors must be aware that profits are not the only possible outcome. While options offer flexibility in many ways, their underlying leverage is a feature that often becomes more primary as expiration approaches. Because of their proximity to expiration, 0DTE trades can carry considerable risk associated with that underlying leverage in conjunction with shortened duration.

For further information on options, investors can review the Characteristics and Risks of Standardized Options, also known as the Options Disclosure Document, or ODD. The ODD provides explanations on call and put options, equity and index options, and many other aspects of options investing.