Introduction
In March of 2024, Roundhill launched the first ever zero-days-to-expiration (0DTE) covered call funds, the S&P 500® 0DTE Covered Call Strategy ETF (XDTE) and the Innovation-100 0DTE Covered Call Strategy ETF (QDTE). The success of both XDTE and QDTE was followed up by the launch of the Small Cap 0DTE Covered Call Strategy ETF (RDTE). These funds revolutionized covered call ETFs by annualizing the highest theta yield possible by selling same-day expiry options for all 252 trading days of the year. (To learn more on this, read our Option Greeks Deep Dive on Theta.)
One frequently asked question regarding our 0DTE suite has been “why don’t the ETFs purchase back their short calls before they expire?” Today, we will dig into that question while learning a bit more about bid/ask spreads and how option transaction costs can build.
What is the Bid-Ask Spread?
Let’s pretend we are at a car dealership. Congratulations, you just bought a brand new 2025 Porsche 911 Turbo. You drive it approximately 1 mile off the dealership’s lot before realizing that your spouse will kill you when you get home. When you take it back to the dealer, will they buy it back at the same price they sold it to you 10 minutes earlier? Sorry, they most definitely will not. That is what we call a two-way market: a market with a different purchase price than sale price, and a spread captured in-between by dealers. Option markets work the same way.
A “bid” is the highest price a buyer will pay for an option, and an “ask”, also called an “offer”, is the lowest price a seller will sell for an option. Which is higher, the bid or the ask? Go back to the car dealership analogy. A market maker is always looking to capture a spread, so if you would like to purchase an option from the market, you will likely have to buy from a seller at a higher price than where you can sell to a buyer. A simple way that I explained this concept on Wall Street: you are always paying or receiving the worst price of the two. This spread is paid each time an option is traded and is considered to be a transaction cost.
Hypothetical Bloomberg Options Monitor Showing Bid/Ask Spread on SPX Options
Meanwhile, a “mid” is considered to be the middle point between these two prices, and we can consider it to be roughly the fair market value (“FMV”) of the option. Though the true FMV can fall anywhere in between bid and offer and will depend on various factors including borrow/funding rates.
Why Are You Buying a Worthless Option?
Perhaps the most important reason not to purchase back a 0DTE call intraday when it trades far out-of-the-money is that the ETF would be buying a nearly worthless call option. Reconsider the earlier commentary around how spreads work. If an option is trading low enough to consider re-purchasing at the offer/ask, its bid and mid must be quite low. In most of these cases, its bid does not exist. That means that a market maker is not willing to take the risk of buying that option, and it should signal to an investor that it is near (if not actually) worthless. See below for an example Bloomberg Options Monitor that depicts the trading of “0 bid” options.
Hypothetical Bloomberg Options Monitor Showing Bid/Ask Spread on “0 Bid” SPX Options
These options have another colloquial name for traders: lotto tickets. They have an inherent cost, are valued at almost nothing, and it’s a long shot that they pay off. From an investment point of view, purchasing lottery tickets day-over-day for a net cost is a losing strategy.
Transaction Costs Trading 0DTEs
Transaction costs are a key consideration in any options strategy. While stocks generally trade at a very tight bid/ask, options do not. These spreads may be inconsequential when trading a single option, but that is not the case in a 0DTE options strategy. The bid/ask spread is crossed every day on 100% of the notional size of the Fund. This makes option transaction costs fairly high relative to other ETFs, even when compared to a monthly or weekly covered call strategy.
Another reason that Roundhill does not re-purchase risk intraday is that it would incur twice the transaction costs, which would eat away at Fund performance over time.
The Value of a Consistent Approach
One additional note worth considering as an investor when evaluating systematic options strategies: a consistent approach will allow you to understand what is going on under the hood. Investing in an actively managed strategy where the trading team is making intraday trading decisions without a tactical methodology can lead to higher transactional fees due to increased trading, frequent changes in trading patterns, and potentially irrational decisions.
In the Roundhill 0DTE ETF suite, risk is not re-purchased intraday via buying back calls or rolling strikes down in the face of a market pull-back. Instead, active management is concentrated in tactical day-over-day strike selection based on volatility metrics, macroeconomic data and events, and annualized yield collection. Strikes are chosen using a systematic approach to mitigate the need to re-purchase risk and increase costs to investors.
Conclusion
This is not to say that re-purchasing risk when it becomes inexpensive is a poor strategy. It can be a very lucrative strategy. Lotto tickets do hit once in a blue moon, and when that happens, an investor who is short a call option will feel the pain. As with any investing strategy, pros and cons must be weighed, and the day-over-day expense of buying back call options intraday is seen as a greater cost than the risk of a near worthless call option ending in-the-money.
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Glossary
The S&P 500 Index is a market-cap-weighted index of 500 of the largest publicly traded companies in the U.S.
A market maker is a firm or individual that provides liquidity by continuously offering to buy (bid) and sell (ask) a financial instrument (like a stock or option).
The strike price is the predetermined price at which the buyer of an option can buy (call option) or sell (put option) the underlying asset.
Disclosures
The 30-Day SEC Yield* (as of 2/28/25) for the Roundhill S&P 500® 0DTE Covered Call Strategy ETF and the Roundhill Innovation-100 0DTE Covered Call Strategy ETF are -0.54%, -0.58%, respectively.***
The Gross Expense Ratio for XDTE and QDTE is 0.95%.
The performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than their original cost. Returns less than one year are not annualized. For the most recent standardized and month-end performance, please click here: XDTE, QDTE.
The Funds currently expect, but do not guarantee, to make distributions on a weekly basis. Distributions may exceed the Funds’ income and gains for the Funds’ taxable year. Distributions in excess of the Funds’ current and accumulated earnings and profits will be treated as a return of capital. Distribution rates caused by unusually favorable market conditions may not be sustainable. Such conditions might not continue to exist and there should be no expectation that this performance will be repeated in the future. Please see the Supplemental Tax Information section of the webpage for more information on the distribution composition including the estimated return of capital. Current distributions may include return of capital.
Per the Funds most recent 19a-1 notice, the estimated per share composition of the distribution includes return of capital (ROC) of 100% for XDTE, QDTE.
A final determination of the tax character of distributions paid by the Funds will not be known until the completion of the Funds’ fiscal year and there can be no assurance as to the portions of each Fund’s distributions that will constitute return of capital and/or dividend income. The final determination of the tax character of distributions paid by the Funds will be reported to shareholders on their Form 1099-DIV.
Please consult your tax advisor for proper treatment on your tax return.
*30-Day SEC Yield: Yield calculation that reflects the dividends and interest earned during the period after the deduction of the fund’s expenses. It is also referred to as the "standardized yield".
This material must be preceded or accompanied by a prospectus.
Click here for the QDTE prospectus.
Click here for the XDTE prospectus.
All investing involves risk, including the risk of loss of principal. There is no guarantee the investment strategy will be successful. The funds faces numerous risks, including options risk, liquidity risk, market risk, cost of futures investment risk, clearing broker risk, commodity regulatory risk, futures contract risk, active management risk, active market risk, clearing broker risk, credit risk, derivatives risk, legislation and litigation risk, operational risk, trading issues risk, valuation risk and non-diversification risk. For a detailed list of fund risks see the prospectus.
Covered Call Strategy Risk. A covered call strategy involves writing (selling) covered call options in return for the receipt of premiums. The seller of the option gives up the opportunity to benefit from price increases in the underlying instrument above the exercise price of the options, but continues to bear the risk of underlying instrument price declines. The premiums received from the options may not be sufficient to offset any losses sustained from underlying instrument price declines, over time. As a result, the risks associated with writing covered call options may be similar to the risks associated with writing put options. Exchanges may suspend the trading of options during periods of abnormal market volatility. Suspension of trading may mean that an option seller is unable to sell options at a time that may be desirable or advantageous to do.
Flex Options Risk. The Fund will utilize FLEX Options issued and guaranteed for settlement by the Options Clearing Corporation (OCC). In the unlikely event that the OCC becomes insolvent or is otherwise unable to meet its settlement obligations, the Fund could suffer significant losses. Additionally, FLEX Options may be less liquid than standard options. In a less liquid market for the FLEX Options, the Fund may have difficulty closing out certain FLEX Options positions at desired times and prices. The values of FLEX Options do not increase or decrease at the same rate as the reference asset and may vary due to factors other than the price of reference asset.
0DTE Options Risk.*** The Fund’s use of zero days to expiration, known as “0DTE” options, presents additional risks. Due to the short time until their expiration, 0DTE options are more sensitive to sudden price movements and market volatility than options with more time until expiration. Because of this, the timing of trades utilizing 0DTE options becomes more critical. Although the Fund intends to enter into 0DTE options trades on market open, or shortly thereafter, even a slight delay in the execution of these trades can significantly impact the outcome of the trade. Such options may also suffer from low liquidity, making it more difficult for the Fund to enter into its positions each morning at desired prices. The bid-ask spreads on 0DTE options can be wider than with traditional options, increasing the Fund’s transaction costs and negatively affecting its returns. Additionally, the proliferation of 0DTE options is relatively new and may therefore be subject to rule changes and operational frictions. To the extent that the OCC enacts new rules relating to 0DTE options that make it impractical or impossible for the Fund to utilize 0DTE options to effectuate its investment strategy, it may instead utilize options with the shortest remaining maturity available or it may utilize swap agreements to provide the desired exposure.
Roundhill Financial Inc. serves as the investment advisor. The Funds are distributed by Foreside Fund Services, LLC which is not affiliated with Roundhill Financial Inc., U.S. Bank, or any of their affiliates.
