Zero-days-to-expiry options, or “0DTE” options, have become a popular topic of discussion amongst market participants over the past several years. And for good reason – according to CBOE, trading in 0DTE SPX (S&P 500) options has grown by 52% annually since 2016, and now represents roughly half of option activity in SPX.
Total SPX Volume by Time to Expiry
Source: Cboe Global Markets data, “The Evolution of Same Day Options Trading”, report as of 8/3/2023.
However, based on financial media reporting, 0DTE sounds scary, risky and volatile – but how are they really different from longer-dated options? Let’s dive in.
What are 0DTE Options?
0DTE options, as their name suggests, are options with zero days left to expiration on the day on which they are traded. While the media might imply otherwise, this concept isn’t new. Since the first options listed decades ago – the Chicago Board Options Exchange was established in 1973 starting with 16 stocks – market participants have had the ability to trade options up until their final day, hour, or even minutes of life until expiry. For example, if you bought or sold a March expiry option on IBM in 1973, technically you were trading 0DTE if you transacted on March 16, 1973.
So then, what has changed?
More Options, No Pun Intended
The proliferation of trading in 0DTEs is largely attributable to increased availability of option expiries that has occurred since S&P 500 options were first introduced by the CBOE in 1983.
- Initially, monthly SPX options were offered, expiring on the third Friday of each month.
- In 2005, CBOE introduced weekly SPX options, expiring Friday of each week.
- In 2016, CBOE expanded weekly SPX options into Monday and Wednesday expirations.
- Finally, Tuesday and Thursday SPX expirations were added in 2022.
As a result of this evolution, 0DTE options are now available to traders every single trading session of the year.
Specifically, the following underlying assets now have option expirations available every trading day on CBOE or Nasdaq:
- Nasdaq 100 Index (NDX)
- S&P 500 Index (SPX)
- Mini-SPX Index (XSP)
- SPDR S&P 500 ETF Trust (SPY)
- Invesco Nasdaq 100 Trust (QQQ)
- Russell 2000 Index (RUT)
- Mini-Russell 2000 Index (MRUT)
How are 0DTE options being used?
As we allude to above, the financial media has largely painted 0DTE options as excessively risky. However, 0DTE options can be used in a variety of ways — same as longer dated options – some of which are riskier than others. In the same way longer dated options can be used to speculate, they can also be used for hedging and volatility dampening. The same can be said of 0DTE, which can be utilized in various strategies that reduce volatility and risk, such as exposure management around key events (i.e. FOMC) and reduced volatility strategies like covered calls. For example, CBOE analysis suggests 50-55% of S&P 500 Index 0DTE trading is spread volumes, an inherently less risky type of trade than single leg trading.
Two such examples of 0DTE use are present in two new Roundhill ETFs – the Roundhill S&P 500 0DTE Covered Call Strategy ETF (XDTE) and Roundhill N-100 0DTE Covered Call Strategy ETF (QDTE). XDTE and QDTE are novel covered call ETFs that overwrite long exposure by selling 0DTE options each morning. The result isn’t excessively risky. In fact, by selling 0DTE calls each morning the Funds collect option premium that helps reduce risk to the downside each day (in exchange for capping that day’s returns). In turn, the Funds pay weekly distributions out of options premium – the only ETFs in the U.S. market to do so.
This is all to say that 0DTE options aren’t necessarily as risky as they might seem on the surface or as the media might portray them. As with any asset class, 0DTE are ultimately tools for investors to implement various strategies, and the onus sits with the investor or fiduciary to use them responsibly in portfolio construction.
Investors should consider the investment objectives, risk, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the ETF please call 1-877-220-7649 or visit the website at https://www.roundhillinvestments.com/etf/. Read the prospectus or summary prospectus carefully before investing.
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.
Glossary
Options: An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date.
Covered Call Strategy: 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.
Out-of-the-Money Options: Out-of-the-money options are options whose strike price is above the market price of the underlying asset.
0DTE Options: 0DTE (zero days to expiration) are options that are set to expire at the end of the trading day on which they are written.
Strike: Price at which the option holder may buy or sell the underlying security, as defined in the terms of the option contract.
S&P 500 Index (S&P 500®): The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
Nasdaq-100 Index (N-100): The NASDAQ-100 Index® is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ. No security can have more than a 24% weighting.
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.
