0DTE options. For some, the ultimate no-go zone in options trading. For others, a powerful high-risk, high-reward strategy requiring a minimal amount of capital.
What is 0DTE?
0DTE options, otherwise known as “zero-days to expiration” options are option contracts where the expiration day occurs on the same day that they’re bought. While 0DTE’s skip out on “overnight risk”, these financial instruments are not for the faint of heart. Their high gamma and theta exposure means that these options can accelerate (and decelerate) in the blink of an eye. In other words, buyer-beware: These are not “high probability trades” — these are tools best handled by experienced traders.
However, that hasn’t stopped 0DTE options from being a popular strategy for retail option traders. Why? Because 0DTE options are often cheap, and they have huge movement potential.
Both to the upside…
And to the downside…
Stories of dramatic gains and losses like the ones shown above have given 0DTE options a certain stigma, and led some to consider 0DTE options as nothing more than a gamble, or a “lotto trade”. That can be true. 0DTE options can be used to make highly leveraged “bets” on a stock’s price direction. However, for experienced traders who know how to operate 0DTE options, these financial instruments are highly effective tools that require only a small amount of capital to function.
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Trading 0DTE Options: 5 Rules to Live By
1: Have a catalyst
With every trade, you should have a clear catalyst in mind. It’s your reason for entering the trade, and it’s even more important for 0DTE options. These fast-paced options trading instruments are armed with plenty of vega, but weighed down with an uncomfortable amount of theta. That means that while the predicted move doesn’t necessarily need to be large, it needs to happen fast in order for the strategy to work as intended. That puts a lot of weight on the catalyst to deliver, lest these options fade into oblivion. As such, 0DTE options are for high-conviction tradesonly — if you aren’t sure about the catalyst, wait for the next one. In other words, when it comes to 0DTE’s: when in doubt, sit it out.
2. Only risk what you can afford to lose
Like the need for a catalyst, this is another important rule for any options trade, but it’s paramount for 0DTE options. These contracts are literally “here today, gone tomorrow”, so you need to prepare for the (hopefully) occasional, sometimes uncomfortable, but ultimately inevitable failed trade. You can do that by sizing positions appropriately, and not taking it personally if a trade doesn’t go your way. Even the world’s top traders aren’t 100% accurate — they just win more than they lose, and they never allow a single trade to capsize the portfolio.
3. Understand the technicals
Technical analysis is what the majority of the algorithms (and thus the majority of stock market trading) rely upon when entering and exiting trades. For that reason, intraday technical breakouts and breakdowns can result in high-speed market moves as lightning-fast trading algorithms stampede into and out of equities. This phenomenon gives lines of support and resistance a sort of magnetism. That’s why knowing where the key technical levels lie can help give traders an edge. But it won’t make a difference if you don’t follow these final two rules.
4. Make a plan
Trading plans are very important, but they don’t have to be complicated. They just need to set clear rules about when you’ll enter and exit a trade — both, in the event that the trade goes your way, and in the event that it doesn’t. In Market Rebellion’s live day trading community the Rebel Pit, every trade idea includes a plan with the following details:
- A catalyst: Often a technical breakout or breakdown
- A strategy: The trade type (option contract and strategy) used to take advantage of the bullish or bearish price action
- A trigger: The point of entry for the position.
- A stop-loss level: The point where price direction has moved against you, rendering the trade thesis nullified. When the stock trades below this level, traders should close the position.
- Profit target levels: The level(s) where a trade has become profitable, and traders should look to take profit on the position, either by rolling out or closing the position.
5. Stick to the plan
Making a plan is only half of the battle. Trading discipline means following through with gametime decisions and leaving emotions at the door. Many traders have lost money by failing to close or roll a profitable trade. Likewise, many traders have lost more than they should have by holding onto an option for longer than they should have. It doesn’t matter that they’re “cheap” — 0DTE option trades need to be handled with as much discipline as any other option trade. Make a plan, and stick to it.
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Day Trade 0DTE Options The “Rebel Pit” Way — Example #1: COST
To see how it works in practice, let’s dissect this 0DTE option trading plan from September 9th, 2022 targeting a bullish breakout in Costco (COST).
THE TRADE IDEA:
- If COST breaks above $533.03 (trigger), consider buying the 0DTE $532.50 calls for roughly $2.50.
- Using slightly-ITM strike prices when trading these 0DTE options is a common theme inside the Rebel Pit. The intention: To negate theta decay as much as possible while still gaining exposure to fast-paced price moves.
- If COST falls back below the trigger or the option decays to 50% of its value, close the position (stop-loss).
- If COST breaks above $534.84, consider taking profit. There are multiple ways to do this:
- Sell some or all of the options outright (Close the option)
- Sell a different call against the pre-existing option at a higher strike (Spread the option)
- Sell the call and simultaneously buy a cheaper, further from the money call (Roll the option)
- If COST breaks above $537.83, repeat the above step by either rolling, spreading, or closing the option.
When this trade idea in Costco was published, the stock was trading at $529.12. After a few hours of choppy trading, shares of COST stepped on the gas — breaking decisively above the trigger level ($533.03) at 12:50PM EST. Within 25 minutes, Costco had broken above the first profit target level ($534.84). A $1.81 dollar move on an ITM 0DTE option represents an added intrinsic value of $181 dollars, plus any additional extrinsic value. For some traders, the story ends here. They close the trade entirely and move onto the next one.
However, for traders who chose to remain in the trade (by either rolling to the next strike or spreading the trade), the new target level to watch became $537.83 — and the new stop-loss became the old line of resistance ($534.84). Other than the shifting target zone, the trading plan remains the same: Traders want to see the support hold as shares of the stock rally through the upper level.
In this case, shares of COST successfully tested the red support level ($534.84) without breaking below. Unfortunately, shares of COST failed to break above the next level of resistance after multiple attempts. When a stock repeatedly tries and fails to break above a resistance level, it’s a sign that the stock is running out of momentum. In those instances, it’s often best to close the trade.
Day Trade 0DTE Options The “Rebel Pit” Way — Example #2: AVGO
Here’s another example from the same day, targeting a similar bullish breakout in Broadcom (AVGO) using slightly-ITM 0DTE call options.
THE TRADE IDEA:
- If AVGO breaks above $520.38 (trigger), consider buying the 0DTE $520 calls for roughly $2.75.
- Once again, this trade takes advantage of slightly-ITM options. If this trade were in OTM options, theta decay risk would be much higher. The fact that they are slightly ITM means traders have exposure to at least some intrinsic value.
- If AVGO falls back below the trigger or the option decays to 50% of its value, close the position (stop-loss).
- If AVGO breaks above $522.74, consider taking profit (once again, by either closing some or all of the option contracts, rolling the options, or spreading the options).
- If AVGO breaks above $525.98, repeat the above step by either rolling, spreading, or closing the trade.
When this trade idea in Broadcom was published, the stock was trading at $517.67. At open, Broadcom began cruising higher, breaking above the trigger level ($520.38) at roughly 10:30AM EST. Within 30minutes, shares of AVGO had risen above $522.74, the first resistance level. Note that in both the COST example and this AVGO example, a break above resistance often leads to swift price action. That’s why it’s so helpful to use technical analysis when trading options.
Like the COST trade, when a stock breaks above the first target level, traders are faced with two choices: remove some of the position, or remove all of the position. Traders who opt to remove some of the position in order to retain exposure to the trade will look at the orange line as the next technical level of resistance, and the red line as support.
After AVGO broke the first target level of resistance, it continued moving toward the orange line before forming a double top and getting rejected. The rejection sent AVGO back home to the first target level, which it immediately broke below. With the support invalidated, it’s time to stick to the plan, close the remainder of the trade, and move onto the next one.
The Bottom Line: Don’t Make 0DTE Options Trades More Dangerous Than They Need to Be
There’s no shortage of people who will tell you that trading 0DTE options is dangerous or carries high risk. And they’re not wrong — traders who don’t know what they’re doing can end up unhappily watching 0DTE options go to zero in the blink of an eye. However, for disciplined traders with a keen understanding of technical analysis, 0DTE options are among the most powerful tools that the stock market has to offer.
Want to get in on the action? Market Rebellion’s Rebel Pit crafts dozens of day trading ideas every week, LIVE as the market moves. From 0DTE options to weekly expiration trades, the Rebel Pit is the home for the guerilla warriors of the stock market — the day traders who want to get in and get out of trades at a moments notice.
If you’re ready to join an active option trading community with live-market analysis delivered by professional analysts and CMT’s, check out the Rebel Pit.
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This story was originally published September 14, 2022 5:53 PM.
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