What Is 0DTE Options and How Do They Work?

Options are financial contracts that derive their value from an underlying asset, such as a stock, commodity, or index. These contracts provide the holder with the right, but not the obligation, to buy or sell the underlying asset at a predetermined price on or before a specific date. In recent years, “0DTE options,” or “Zero Days To Expiration” options, have gained considerable attention. They are distinguished by their extremely short lifespan and unique dynamics compared to traditional longer-dated contracts.

Core Definition of 0DTE Options

A call option provides the right to purchase an asset, while a put option grants the right to sell it. The defining characteristic of “0DTE” options, an acronym for “Zero Days To Expiration,” is that they expire on the same trading day they are transacted.

This means that if an investor buys a 0DTE option on a Monday, the contract will expire at the close of trading on that same Monday. This contrasts sharply with standard options, which might have weekly, monthly, or even yearly expiration cycles. The brief time horizon of 0DTE options is their most distinguishing feature.

Common underlying assets for 0DTE options include major market indices, such as the S&P 500 Index (SPX), and highly liquid, actively traded stocks. These options are available as both calls and puts, allowing participants to speculate on upward or downward price movements of the underlying asset. The same-day expiration means that any value derived from the option must be realized within hours of its purchase.

0DTE options settle based on the closing price of the underlying asset. The compressed timeframe amplifies the impact of price movements and time decay on the option’s value.

Behavior of 0DTE Options on Expiration Day

The short lifespan of 0DTE options profoundly influences their price behavior, primarily through the accelerated decay of their extrinsic value. Extrinsic value, often referred to as time value, represents the portion of an option’s premium beyond its intrinsic value. As an option approaches expiration, this time value erodes at an increasing rate.

For 0DTE options, time decay, or theta, is highest on the final day. This means that the option’s value can diminish rapidly, especially if the underlying asset remains stagnant or moves unfavorably. Out-of-the-money options, which have no intrinsic value, are particularly susceptible to this rapid erosion, often becoming worthless by expiration if the underlying price does not move significantly in their favor.

0DTE options also have heightened gamma sensitivity, sometimes referred to as “gamma explosion.” Gamma measures the rate of change of an option’s delta, which indicates how much an option’s price is expected to move for every one-point change in the underlying asset. For 0DTE options, gamma becomes high, particularly for options near the money.

This elevated gamma means that even minor price fluctuations in the underlying asset can lead to magnified and rapid price swings in the 0DTE option. A small move in the underlying can cause a large percentage change in the option’s price, offering substantial profit potential but also considerable risk. Simultaneously, delta, which measures the option’s sensitivity to the underlying price, changes rapidly as the option moves closer to or further from its strike price near expiration.

Market Characteristics of 0DTE Options

The market for 0DTE options displays distinct characteristics. These options often exhibit high trading volumes, particularly on major indices. Despite high volume, liquidity can be dynamic and sometimes fleeting.

Bid-ask spreads for heavily traded 0DTE options can be tight, sometimes just a few cents, but can also widen. This widening often occurs during periods of heightened market volatility, rapid price movements in the underlying asset, or when trading less common strike prices. Such widening can make entering or exiting positions less efficient for participants.

Implied volatility influences the pricing of 0DTE options on their expiration day. Implied volatility reflects the market’s expectation of future price swings in the underlying asset. News events, such as economic data releases or corporate announcements, can cause spikes in implied volatility, leading to sharp price reactions in 0DTE options.

0DTE options appeal to participants due to their potential for quick, significant price movements and their limited time horizon. This allows participants to take short-term directional views on the market without committing capital for extended periods. The compressed timeframe and amplified sensitivities create a unique trading environment.