- October 22, 2024
- Posted by: Mark Soberman
- Category: Trading Article
In the world of options trading, there’s a growing interest in 0DTE options.
0DTE stands for Zero Days to Expiration.
As the name implies, these options expire on the same day they are traded. These short-term options offer really interesting opportunities for traders to generate fast income.
Traders are now using 0DTE options with ETFs to enhance returns.
HOW?
We’ll get to that in a moment. First some more info…
All About 0DTE Options
0DTE options are simply short-term options contracts. Often these are options contracts set to expire by the end of the trading day. As a note, some traders also lump in options expiring in 2 or 3 days when discussing 0DTE options.
Options lose value over time. Because 0DTE options expire so quickly, they see a dramatic acceleration in time decay, also known as theta.
Theta measures how much an option’s price decreases as it approaches expiration.
With 0DTE options, this decay happens within hours. The fast time decay creates several interesting ways to capture value through smart trades.
Perfect for traders selling options!
Enhance Returns With 0DTE Options
Consider selling call options.
Normally you sell a call option, capturing the premium as income. In exchange, you take on the risk of the stock moving. By using 0DTE options, you don’t have to hold the position overnight!
This means you avoid the risk of unexpected news or events causing large price swings when the market is closed.
As a trader you can focus on intraday movements, taking advantage of short-term price fluctuations.
By selling 0DTE options, you can generate income through the options premium you collect. Since these options expire by the end of the day, they are particularly appealing to those seeking quick returns without long-term exposure to market risks.
0DTE options are a fast way to put cash in your pocket!
For example, if you sell a 0DTE call option on SPY. If the price of SPY doesn’t climb significantly that day, the option will expire worthless, allowing you to keep the entire premium.
Cash in your pocket!
While 0DTE options can be a powerful tool for traders, they’re best suited for those who are experienced and comfortable with short-term market dynamics.
These strategies require close monitoring of the market and quick decision-making, as even small price movements can significantly impact your position.
However, for those seeking to generate consistent income through option premiums, 0DTE options are a compelling strategy, particularly when applied to liquid ETFs.
Why ETFs?
Certain ETFs provide better liquidity
Liquidity is an important consideration. While popular ETFs like SPY and QQQ are highly liquid, not all ETFs have the same level of activity.
Lower liquidity could mean wider bid-ask spreads and higher transaction costs, making it difficult to execute trades at favorable prices. This is why sticking to the most active ETFs is essential when trading 0DTE options.
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