0dte Options: A Comprehensive
Overview
0dte options, also known as zero-days-to-expiration options, have
recently gained significant traction in the world of trading, particularly
among retail investors. These options, as the name suggests, expire on
the same day they are traded, introducing a unique set of
characteristics and challenges. In this comprehensive overview, we'll
delve into the intricacies of 0dte options, examining their advantages,
drawbacks, and strategies for effective utilisation and comparison on
Indian context.
Advantages of 0dte Options:
1. Low Cost: Due to their lack of time value, 0dte options are
generally less expensive than longer-term options, making them
an attractive choice for traders seeking quick profits.
2. High Volatility: The limited time frame of 0dte options often leads
to heightened volatility, offering traders the potential for
substantial gains. However, this volatility also amplifies the risks
involved.
3. Limited Risk for Option Buyers: Unlike option sellers, option buyers
in 0dte trades face a clearly defined maximum loss, limited to the
premium paid for the option. This allows traders to manage their
risk by carefully selecting strike prices and expiration dates.
Changing Dynamics of 0dte Options in India:
The advent of 0dte options is very recent in global indices history, from April
2022, SPX started offering option expiries on Monday, Wednesday and Friday.
And from Sept 2022, Tuesday and Thursday expires were added.
The introduction of 0dte options in India, following SPX, has brought
about a significant shift in market dynamics, particularly with the
advent of Banknifty weekly expiries on Wednesdays in September 2023.
The S&P 500 (SPX) is a broad stock market index that tracks the
performance of 500 of the largest publicly traded companies in the US.
SPX 0dte experies are also happening daily for the same index. As a
result, it is less volatile than the NSE/BSE 0dte indexes, which track the
performance of a smaller number of companies (12-50) that often
overlap between indexes and expiries.
For our context, the correlation between the 0dte expirations, which
change from day to day, is even more striking. The Nifty 50 remains our
mother index due to its broad components and largest volumes.
This has a significant impact on the dynamics of the option chain, which
many traders rely on. While a directional move is typically indicated by
OI unwinding in that direction, the move may not be supported and may
reverse due to correlation and weightings. This occurs because OI is
built up on the mother index while it is unwinding on the expiring index,
ultimately causing market reversals.
This, along with the subsequent addition of 6 equity index expiries in 5
days, has led to several notable changes:
1. Increased Success for Option Buyers: Option Buyers have
witnessed higher rewards with limited risks from 0dte trades,
benefiting from the heightened volatility and shorter time frame.
2. Diminishing Probabilistic Edge for Sellers: The probabilistic edge
that option sellers typically enjoyed has become less reliable due
to the changing market dynamics and increased correlation
among indexes.
3. Irrelevance of Quantitative Backtests: Traditional quantitative
backtests, based on historical data, have become less relevant in
predicting option behavior due to the dynamic nature of 0dte
expiries.
4. Skewed Implied Volatilities (IVs) and Historical Volatilities (HVs): IVs
and HVs have deviated further from realized volatility, making it
more challenging to accurately gauge option pricing.
5. Erratic Option Premium Behavior: Option premiums have become
more erratic, experiencing frequent spikes and causing
stop-losses to be triggered more often.
Recommendations for Managing 0dte Options Trading:
To effectively navigate the 0dte options trading landscape, consider
these strategies:
1. Diversify across multiple expiries, including current week, next
week, and monthly expiries, to mitigate gamma risk.
2. Employ limited risk positional strategies like iron flies and iron
condors on higher time frames and longer expiries for more
stability.
3. Balance 0dte option selling with uncorrelated 0dte option buying
strategies, allocating capital according to your risk tolerance.
4. Shift from time-based option selling strategies to wait-and-pause
intraday option selling strategies to adapt to the dynamic market
conditions.
Conclusion:
0dte options present a unique set of opportunities and challenges,
demanding a comprehensive understanding of market dynamics, risk
management, and strategic adaptation. By carefully considering the
recommendations outlined above and staying informed about evolving
market conditions, traders can navigate the 0dte options landscape
with a greater likelihood of success.
