Zero DTE Options: Top 3 Strategies for Efficient Trading

Zero Days to Expiration (0DTE) options have exploded in popularity, offering unique opportunities for traders. This article, based on insights from Mike Bella Fury and Seth freudberg of a New York City proprietary trading firm, breaks down what 0DTE options are and reveals three strategies to trade them effectively.

What are Zero DTE Options?

Zero DTE options are options contracts that expire on the same day they are traded. Seth freudberg explains that the appeal lies in their reduced capital requirements compared to longer-dated options. Critically, the outcome of the trade is determined and profits (or losses) are locked in at the end of the trading day, eliminating overnight risk.

Strategy 1: Put Credit Spread (Bullish Strategy)

This strategy profits when you anticipate an asset's price will increase or stay relatively stable.

How it Works

1. Sell a Put: Sell a put option with a strike price slightly below the current market price.
2. Buy a Put: Simultaneously, buy a put option with a lower strike price to limit potential losses.

Example

On August 30th, a trader believed a strong SPX rally would continue. The SPX was trading at 4568.0.

• Sold a 4550 put for \$9.55.
• Bought a 4490 put for \$4.35.

This generated a net credit of \$520. If the SPX closes above 4550, both options expire worthless, and the trader keeps the \$520.

Outcome

Since the SPX closed at 4548.7, both puts expired worthless, allowing the trader to retain the initial $520 credit. The trader was only risking 980 which resulted in a 53% return in a single day.

Strategy 2: Iron Condor (Neutral Strategy)

The Iron Condor is best used when you expect minimal price movement in an asset.

How it Works

1. Sell a Call: Sell a call option with a strike price slightly above the current market price.
2. Buy a Call: Buy a call option with a higher strike price (above the short call) to limit losses.
3. Sell a Put: Sell a put option with a strike price slightly below the current market price.
4. Buy a Put: Buy a put option with a lower strike price (below the short put) to limit losses.

Example

On August 11th, the SPX index was trading around 4461.

• Sold a 4475 call for \$5.50.
• Bought a 4485 call for \$2.90.
• Sold a 4445 put for \$5.70.
• Bought a 4435 put for \$2.60.

This generated a net credit of \$470.

Outcome

The SPX closed at 4464.5, meaning all options expired worthless. The trader pocketed the initial \$470 credit. The trade would have been profitable as long as the closing price remained between 4445 and 4475.

Strategy 3: Zero DTE Call Calendar Spread (Time Decay Strategy)

This strategy profits from the faster time decay of short-dated options compared to longer-dated options.

How it Works

1. Sell a Call: Sell a call option that expires today (0DTE).
2. Buy a Call: Buy a call option with the same strike price, but expiring the next day.

Example

On October 16th, the SPX index had rallied to 4375.09.

• Sold a 4375 call expiring that day for \$10.70.
• Bought a 4375 call expiring the next day for \$18.50.

The net cost was \$780.

Outcome

The SPX closed at 4373.63. The sold call expired worthless. The purchased call, expiring the next day, retained a value of \$13.35 due to potential overnight movement. This resulted in a profit of \$555 (a 71% return).

The Advantage of Zero DTE Options

Previously, traders had only one options expiration per month. With 0DTE options, you have approximately 250 opportunities per year to implement these strategies. By mastering these strategies, traders have an increased opportunity to create a significant income stream.