- August 17, 2024
- Posted by: CoachMike
- Categories: Day Trading, Options Trading, Swing Trading, Trading Article
With the popularity of short-term 0DTE options exploding over the last few years, we believe every trader should have them in their toolbox. There are currently only a handful of markets that offer the daily options but we expect the list to grow going forward.
Favorite Markets for 0DTE Options
We are going to take a look at our favorite markets that we like to trade using 0DTE options. We will cover why they make it to our list, what to watch for when trading them, and the best times of day to look for trades.
The three markets that we like to use with our 0DTE strategy are the S&P 500 ETF (SPY), the Nasdaq ETF (QQQ), and the Russell 2000 ETF (IWM). All three of these offer options that expire at the end of the trading day, Monday through Friday.
Every individual stock that offers weekly options will also have 0DTE opportunities every Friday. However, they are not a core strategy for us as we like to trade products that give us trading opportunities Mon-Fri.
Let’s take a closer look at the top 3 0DTE markets that we like to trade.
S&P 500 ETF (SPY)
Overview
SPY is an exchange-traded fund that tracks the S&P 500 cash index (SPX) but is 1/10th the size. As a result, it is a much easier product for retail traders to use. The fund tracks a market cap-weighted index of US large and mid-cap stocks.
SPY options trade between 9:30 am – 4:15 pm Eastern time. Please note the options trade an extra 15 minutes after the equity close at 4:00 pm Eastern time.
Components
Trading options on an ETF allows us to quickly diversify with minimal capital required. While SPY tracks a whole basket of stocks, it is heavily influenced by a few stocks.
The top 5 holdings in SPY make up 25% of the product as you will see below:
- AAPL – 6.94%
- MSFT – 6.72%
- NVDA – 5.74%
- AMZN – 3.4%
- META – 2.53%
With these 5 stocks having a big influence on how SPY trades, it gives us the ability to gain exposure to these 5 tech names with far less capital.
Options Stats
SPY is one of the most liquid markets daily with massive volume in the options. Most strike prices in the daily options will have volume and open interest in the thousands of contracts.
You will be able to see this great volume reflected in the prices of the options. The options will typically have bid/ask spreads between .01-.03 wide. This makes it easier to get filled on our order prices quickly.
How to Trade
We like to use a mix of options strategies when trading SPY. This includes looking for long calls and long puts to benefit from a quick directional move as well as selling credit spreads to take advantage of the time decay that will add up quickly throughout the day.
When using long options we like to go 1-2 strikes out of the money at the time of entering the position.
When selling credit spreads, we like to collect enough premium to leave us with a risk 2-3 to make 1 scenario.
We find the best times of day to look for trades on SPY are between 9:30-11:30 am Eastern time and then again between 3:00-4:00 pm Eastern time. These windows of time will typically produce the best movement along with the best trading volume making it easier to get in and out of trades quickly and at good pricing.
Nasdaq ETF (QQQ)
Overview
QQQ is an exchange-traded fund that is based on the Nasdaq-100 index, which is a modified market cap-weighted index of 100 Nasdaq stocks.QQQ options trade between 9:30 AM – 4:15 PM Eastern Time. Please note the options trade an extra 15 minutes after the equity close at 4:00 PM Eastern Time.
Components
Trading options on an ETF allows us to quickly diversify with minimal capital required. While QQQ tracks a whole basket of stocks, it is heavily influenced by a few stocks. The top 5 holdings in QQQ make up 35% of the product:
- AAPL – 9.18%
- MSFT – 8.32%
- NVDA – 7.38%
- META – 4.95%
- AVGO – 4.90%
With these 5 stocks having a significant influence on how QQQ trades, it gives us the ability to gain exposure to these tech names with far less capital.
Options Stats
QQQ has great liquidity daily with big volume in the options. Most strike prices in the daily options will have volume and open interest in the thousands of contracts.
You will be able to see this great volume reflected in the prices of the options. The options will typically have bid/ask spreads between .01-.04 wide. This makes it easier to get filled on our order prices quickly.
How to Trade
We like to use a mix of options strategies when trading QQQ. This includes looking for long calls and long puts to benefit from a quick directional move, as well as selling credit spreads to take advantage of the time decay that will add up quickly throughout the day.
When using long options, we prefer to go 1-2 strikes out of the money at the time of entering the position.
When selling credit spreads, we like to collect enough premium to leave us with a risk of 2-3 to make 1 scenario.
The best times of day to look for trades on QQQ are between 9:30-11:30 AM Eastern Time and again between 3:00-4:00 PM Eastern Time. These windows typically produce the best movement along with the best trading volume, making it easier to get in and out of trades quickly and at good pricing.
Russell 2000 ETF (IWM)
IWM is an exchange-traded fund that is based on the Russell 2000 index, which is a market cap-weighted index of US small-cap stocks.IWM options trade between 9:30 AM – 4:15 PM Eastern Time. Please note the options trade an extra 15 minutes after the equity close at 4:00 PM Eastern Time.
Components
Trading options on an ETF allows us to quickly diversify with minimal capital required. IWM isn’t as heavily influenced by the top 5 holdings like SPY and QQQ. This can make IWM a product that tends to be streaky in how it trades. When IWM is active, it is a great product for active traders.The top 5 holdings in IWM make up only 2% of the product:
- INSM – 0.46%
- FTAI – 0.42%
- SFM – 0.39%
- PCVX – 0.34%
- FLR – 0.33%
IWM gives us exposure to small-cap stocks, which are very different from the top 5 holdings in SPY and QQQ, allowing for better diversification in our trading.
Options Stats
IWM has good liquidity daily with big volume in the options. Most strike prices in the daily options will have volume and open interest in the thousands of contracts.
You will be able to see this great volume reflected in the prices of the options. The options will typically have bid/ask spreads between .01-.04 wide. This makes it easier to get filled on our order prices quickly.
How to Trade
We like to use a mix of options strategies when trading IWM. This includes looking for long calls and long puts to benefit from a quick directional move, as well as selling credit spreads to take advantage of the time decay that will add up quickly throughout the day.
When using long options, we prefer to go 1-2 strikes out of the money at the time of entering the position.
When selling credit spreads, we like to collect enough premium to leave us with a risk of 2-3 to make 1 scenario.
The best times of day to look for trades on IWM are between 9:30-11:30 AM Eastern Time and again between 3:00-4:00 PM Eastern Time. These windows typically produce the best movement along with the best trading volume, making it easier to get in and out of trades quickly and at good pricing.
Conclusion
Trading 0DTE options can lead to big opportunities daily from trading these three markets. You could pick one of these three and have plenty of trading opportunities each week. Just keep in mind these products can move quickly, so keep the risk small. If you can commit to doing that, you will be well on your way to profitable trading.