Hey There Income Hunter,
Repeatable patterns have developed in zero days to expiration options (0DTE).
Volumes have stabilized in 2023, giving us a chance to review high probability trades we can execute to generate profits.
For any market to stand the test of time, it needs a good mix of players with offsetting strategies. That leads to building liquidity and depth.
0DTE provides does just that, including a mix of:
- Directional traders who purchase “lottery tickets,” meaning fading rallies by buying low-cost puts and vice versa
- Traders using 0DTE for specific hedging purposes
- Market makers, option dealers and volatility funds
- Retail
Today we will look at how the money is being made in this fascinating product.
Volumes Have Stabilized
A massive spike in 0DTE volumes occurred in 2022 after the Tuesday/Thursday expiries were added.
You can also see in the chart below that after volumes shifted from longer-date options to 0DTE in 2018-2020, all volumes rose in 2022-2023.
During the recent spikes in all volumes, option positioning analysis took on greater importance as its impact on changes in the underlying price became more obvious.
Lower 0DTE Put/Call Ratios
A positive development for 0DTE is that it is less of a portfolio hedge than longer-dated options.
This has made them a complimentary addition for options traders as opposed to a replacement product.
As you can see in the chart below from SpotGamma, 0DTE put/call ratios on average are 33% less than all volume option ratios.
This adds a more balanced dynamic, which is driven by traders focused on mean reversion strategies versus longer-dated options, which are predominantly used for protecting their portfolios from downside risk (buying puts).
Negative Gamma Impact of 0DTE
Market maker option positioning analysis for 0DTE options is very interesting because 0DTE volumes do not translate into large changes in open interest.
So, what does that mean?
The Morgan Stanley chart below shows the negative gamma that builds during the day, which illustrates two important points …
- The majority of opening trades in 0DTE is put and call buying as traders look to monetize a larger potential move up or down.
Market makers must then sell options and delta-hedge with offsetting stock positions.
This creates a negative gamma position, which is then reversed at the end of day as traders close their long option positions.
- This trade fuels the mean reversion impact of 0DTE flows that is repeated due to the need for traders to monetize their profits versus holding positions through settlement.
Now, this is an important point to understand …
0DTE may offer margin benefits to various classes of traders since most positions are not held overnight.
What’s the Trade?
Hopefully you can clearly see how 0DTE can add profits to your brokerage account.
My inside baseball conclusion is that 0DTE option flow is more of a mean reversion, buy-the-dip-sell-the-rip product versus longer-dated options.
This is valuable for selling put/call vertical spreads, which provide a strategy that can generate consistent profits as long as you manage the risk properly.
Want exclusive access to trades I focus on in the 0DTE space? Join me in my Win the Week service.
Let’s Go!
Live and Trade With Passion My Friend,
Griff