The world of zero DTE options trading is exploding right now as traders are seeing the opportunity of buying options and seeing 2 to 10x returns in a matter of minutes or hours. In this video, I want to explain what zero DTE options are, how they work, the opportunities that they present. I'm going to walk through some real zero DTE option examples, and I'm going to visualize the performance of these options so you can clearly see the opportunities and risks present with zero DTE options. So what are zero DTE options? Zero DTE options are option contracts with zero days to expiration.
In the options trading world, DTE is short for days to expiration and zero DTE just means that these options are expiring the same day. When we go down to the zero DTE time frame, we are going to be looking at minute by minute performance in the market as opposed to daily, weekly, or monthly performance. Why are zero DTE options so popular? First is that they are cheap. Longer term options are much more expensive.
So zero DTE options are much more accessible for traders with small accounts so for example QQQ price as of today was three forty nine twenty and I looked at the zero DTE 350 strike call this call was trading for around a dollar and ten cents meaning the entry cost is a hundred and ten dollars The 81 day 350 strike call was trading for sixteen dollars or an entry cost of $1,600. So clearly we can see that these zero DTE or very short-term options are much cheaper and much more affordable than these longer-term options of the same type and strike price. The second reason zero DTE options are so popular is that they move fast.
They are extremely volatile. When the stock price moves, short-term options experience much larger price changes in percentage terms compared to longer-term options of the same type and strike price. So I put this table here just as an example. Let's say QQQ is at $3.50 and I put these estimated call price changes with a $1 change in QQQ.
So we have the $3.50 call price at the zero data expiration, 18 day and 81 day expirations that we talked about in the previous slide. And to keep things simple, we are just going to estimate that these options, since they are at the money, will change by about $0.50 for a $1 change in QQQ. That means that this $1.10 option, if it moves 50 cents with a $1 change in QQQ, that would represent a 45% change in the options contract price.
If we go to the 18-day expiration cycle, that same $1 change in QQQ, driving a 50 cent change in the option, results in a 7% plus or minus change in the options price. And then if we go to the 81-day cycle, of course, we see that this 50 cent change is a plus or minus 3% change in the options price. So these zero DTE options are extremely sensitive to changes in the stock price and that is why they can see such explosive price movements and it's also why they can see a vaporization of their prices when the price moves against them. Due to zero DTE options being so popular, they have extremely high liquidity which means they are very heavily traded.
So this means that they will have very tight bid ask spreads and you'll have the ability to trade large contract quantities if you are a trader with a larger account. And I just pulled this up here from today. This was in the zero DTE cycle.
And we can see that at various strike prices here, the volume for these call options was in the tens to hundreds of thousands. So this 350 strike QQQ call today traded 213,000 contracts, which is absolutely massive. The next reason that I think zero DTE options are super popular is that you will end the day in cash if you are trading mostly zero DTE options.
So since you're closing your positions the same day, you're going to be cashing them out and you will have no overnight market risk. Let's go through some specific examples so you can visually see how sensitive zero DTE options are to changes in the stock price. For these examples, we're going to be looking at SPY options.
This first example, we're looking at October 6th, 2023. On this trading day, SPY began the day around $422. And as we can see, just rocketed higher through the entire trading day, reaching a high price of $431, ending right below $430. So this is a really big move for SPY. And on the bottom part of this graph, we're looking at the call option with zero days to expiration with a strike price of $4.22. We can see that this option opened with a price of around $1.20, let's call it, and reached a high price of $9 throughout the trading day.
And this is because SPY had a massive run up and this call ended deep in the money and basically had a 9x. increase in its price throughout this trading day. So if you're on the right side of the trend with zero DTE options, you can make a lot of money. But of course, it is not always going to work that way. And even if you bought this contract, you probably would not have held it until that $9 mark.
So let's look at another option on the same trading day that saw some serious volatility in its price. In this example, we're looking at the same trading day, October 6, 2023, except this time we're looking at the 430 strike calls. So at the beginning of the day, SPY was a little bit below $4.22 and this $4.30 strike call was deep out of the money and since it had hours until it expired, it started with a price near zero.
But since SPY started to rip higher early through the day and reached up to a price of $4.29 at around noon eastern time, we can see that this option started to increase in value as its strike price got closer to at the money. The call's price went from basically zero or pennies on the dollar up to around 60 cents here then we saw it dip back here and then at the high of the day when spy was at 431 this 430 strike call reached a high price of a dollar and 20 cents so it went from basically pennies on the dollar to a dollar and 20 cents this would have been a 100x trade obviously any trader with good risk management would not be yoloing all their money into these 430 calls at the beginning of the day So it's highly unlikely that a trader would have caught these returns, but it's an example of how these options can see explosive growth in their prices. It is also an example of how quickly things can turn around.
So from this high price where SPY was at $4.31 and this $4.30 strike call was in the money, we can see that its price went from $1.20 all the way to zero in the last couple hours of the day because SPY went from $4.31 to just below $4.30. If you're enjoying these slides and you'd like to download this presentation for free, in addition to my 170 plus page options trading for beginners PDF, check the link in the description below. The next thing I want to talk about is time decay.
And since we're trading options with literally hours until they expire, you can see the options decaying minute by minute when you're trading these options. And here's a good example of how you can be right directionally on a trade, but you can lose money because you just don't have enough time for things to work out. and the decay is just overwhelming your position.
So here we're looking at the 425 strike call options on October 5th, 2023. Here we can see SPY starts right around 424. And we can see that in the beginning of the trading day, SPY trades down to 421.50 or 421.60 or so, and then retraces all the way up to 425, which is this call's strike price. But we can see over that same period where SPY went from 424 up. to $4.25, we can see that this $4.25 strike call went from right around $0.90 down to around $0.60. So this call option lost 30% of its value over this period, even though SPY eventually did go up to $4.25 and increased from the initial entry point. So this is highlighting that if you buy zero DTE options and they are not in the money, even if the stock price moves in your favor, if it's over the course of most of the trading day, most likely you are still going to lose money because these options decay so rapidly.
Now that we've gone through these examples and due to their volatility, I want to talk about some management best practices or just some ways that you can go about thinking about managing zero DTE option positions. One benefit of trading zero DTE options is that they're cheap and so the average trader can buy more contracts as compared to longer term options. And owning more contracts allows for more strategic and flexible trade management, which I'll talk about right now. Since these options are so volatile, if you get a move in your favor, it is very smart to start scaling out of the position.
And here's exactly why. And here's an example. Let's say we start with 10 contracts at $1 a piece. This means we're going to start by paying $1,000 for this.
zero DTE option position. And let's say we set our stop loss initially at 30%, which means we're going to close these options if they fall to 70 cents. Let's say we were correct in our entry point and this position is starting to move in our favor. Let's say we go up 20%. At this point, we could do something like sell half of our contracts or five of the contracts at $1.20, therefore collecting $600 back into our account.
So we're essentially removing 60% of our initial risk and we still have five contracts left. After we make this first scale out we could move our stop loss higher or to break even. So for instance from 70 cents we could move our break even up to 90 cents or a dollar and this would reduce the risk on our position significantly. Now let's say after that the position continues moving in our favor and we get up to a 50% return on our contracts.
At this point we could scale out even further and we could sell three contracts at $1.50 and this would collect another $450 back into our account leaving another two contracts remaining. At this point we could move our stop loss up again and we could move the stop loss up to a 20% return from the initial price. So since the contracts are now at $1.50 we could move our stop loss up to $1.20 and therefore if we go back to the $1.20 price we will close the remainder of our contracts and we will close those for a 20% return.
Also of note at this point is that we've taken all of our initial capital out of the trade plus $50 in profits So initially we paid $1,000 for these 10 contracts and after these two scale outs. We've taken $1,050 back into our account Which means we've de risk the trade completely and put an additional $50 in our pocket And we've also moved the stop-loss up to a dollar twenty So if we do sell these other contracts for a dollar twenty will take another $40 in P&L on this trade So the remaining two contracts can be held as runners or contracts that are held to push for bigger profits on this trade, specifically 100 plus percent or more gains. And we can do this knowing that since we've already taken profits out of this trade and we've moved our stop loss up to a 20% return on this second scale out, we can comfortably hold these runners not feeling too greedy pushing for this 100% profit mark on the remainder of the contracts. so the reason this first scale out is really important is because it de-risks the trade significantly or entirely allowing us to hold the remainder of the position stress-free next i want to go over some stop-loss math just to give you a little bit more insight into why closing a portion of your position at profits is such a good idea so again let's say we start with 10 contracts at one dollar paying a thousand dollars our initial stop loss is at 30 or closing these out at 70 cents each Let's say the position goes up 20%, we sell five contracts for $1.20, taking $600 back into our account. We still have five contracts remaining.
But since we closed half the position for a 20% gain, the remainder of the position could be closed for a 20% loss, and the entire trade would break even. So this makes it so the trade can actually run against us further, and we can still make money or break even on the trade. For example...
If we sell five contracts at $1.20 or a 20% gain, then we will take in $600. But if the trade starts moving against us and then we sell the remainder of the contracts at $0.80 or a 20% loss from our entry point, then we will have taken a total of $1,000 into our account. Initially, we paid out $1,000, so we make $0 on the trade. This means that if you close a portion of the trade for profits and then the position goes back to your entry price, and you close the remainder of it for your entry price, you're going to end up making money on that trade. When it comes to zero DTE options trading, I think the management is super important because since they're so volatile, it would be very easy to see a profitable position turn into a losing trade.
And so when you are trading them, if you do trade them, if you take off a portion of the position for profits, it's going to give you a lot more flexibility with managing the rest of the position. And it's also going to allow you to hold the remainder of the position with a lot less stress. Now that we've talked about the opportunities present with zero DTE options trading, I want to talk about the primary risks.
First and foremost is obviously since the volatility can work for you, the volatility can also work against you. As we saw in these past examples where the option prices went up huge, but then went to zero just as quickly. So this is a type of trading where you are not risking a significant portion of your account in the trades. You are risking a very small portion of your account in each of these trades and you are managing them.
like I described in the previous slides, so that you can de-risk the position very quickly and you can hold the rest of the position very comfortably. The second primary risk is, of course, the rapid time decay. Since we're trading options that expire that day, literally you are going to see the options decay, especially if you enter a position and the stock price isn't moving for 15 or 30 minutes.
You are going to witness in real time those options decaying and your position losing value. The last thing I want to mention is psychological. health and well-being.
When you're trading weekly, quarterly, or yearly option strategies, you are not watching every tick in the market and small movements against you in the market are not going to have as large of an impact on your P&L as compared to zero DTE options trading. And when you're trading zero DTE options, you are trading minute by minute time frames and that means you're getting a lot more screen time in and it can be very stressful to watch every tick in the market, especially when things are not going your way. So definitely keep an eye on your psychological health if you dabble with zero DTE options.
And if you're noticing any deterioration in your well-being, definitely take a step back and re-evaluate if zero DTE trading is suitable for you. I really hope you enjoyed this video. Leave me a comment down below.
What do you think of zero DTE options trading? Have you tried it? Have you had success with it?
Let me know in the comments below as I'd love to hear from you. My name is Chris from Project Finance, and I will see you all in the next video.