Date: 2/29/2023
Author: Chris Hood
There has been a massive spike in the volume of 0 DTE options traded.
And the most likely reason is the number of retail traders in the market. These aren’t a strategy that institutional traders typically use.
I’ve been hearing lots of talk about trading these options.
Can you make money on them?
Are they too risky?
Have they somehow affected volatility in the market?
As someone who trades these often, I thought I thought I’d provide some insights from experience.
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First, let’s look at selling strategies – credit spreads and iron condors.
The only real difference between selling options intra-day and over the course of a week is the selection of time frames.
I prefer working off the 15, 21, 30, and 45-minute charts for these strategies.
All of the mechanics are the same, but you should be aware of a couple of nuances.
Time of entry is critical.
To take maximum advantage of theta decay during the day, try to get your spread trades placed before 11:30 am EST.
Premium drops rapidly after that, so we need to get in early. Remember that you want to collect as much money as possible for your risk when selling.
If you decide to sell credit spreads or condors near the close of the day, try to get those done before 3:45 pm EST.
Same reason.
Be sure to have your autoclose orders in for 50% profit, and I suggest a stop loss of 3x the credit received.
One more issue on 0DTE spreads and condors. NEVER use them on anything except indexes or futures options.
Those options are cash settled, so there’s no assignment risk.
Most of the same criteria apply to those who would rather play directionally by buying calls and puts.
Because we’re buying, wait until after 11:30 am EST, so you don’t overpay due to morning volatility.
I prefer trading on the 5-15 min time frame for these.
I don’t want to hold them long, but anything shorter than 5 minutes gives me a headache. Too much noise and too many conflicting signals.
Some people do scalp on the 1- or 2-minute charts, but that’s not for me.
The key issue with 0 DTE calls and puts is that you’re fighting against time decay. The move you want must happen quickly, or the trade is broken.
Trades started earlier in the day can handle a small bit of a pullback and profit.
The later you place the trade, the more damage a single candle can do to your position. I recommend setting a tight stop using the previous candle.
Set it at the low of that candle for calls and at the high for puts.
If the trade starts working, trail the position by moving the stop to the next candle.
To make a profit day trading 0 DTE, you must have a robust system for determining direction. Ensure your strategy is back-tested and has a win rate of over 50% with a profit factor of over 1.2 or more.
There are many ways to play, but this is how I do it.
And it works.
Keep these tips in mind when you make your own trades.
Cheers,
Chris Hood
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