The New Wild West of Options Trading

Sean McLaughlin
March 21, 2023

The shorter my timeframe, the shittier the market. ~ Brian Lund @bclund

That quote was uttered during a Twitter spaces I hosted yesterday in which we discussed the emergence of “0-DTE” options and the opportunities and challenges they are spawning.

As Brian brought up, the phrase “0-DTE” which stands for “zero days until expiration” is a bit of a misnomer as options that are expiring today were not necessarily first listed for trading on the same day that they expire. Regarding SPY or SPX options, some of these “daily” options are first listed for trading as far as two weeks from expiration day. So if you were to look at the options chain for SPY, you would see options expiring every day over the next two weeks.

As many of you know, I’m a frequent trader of SPY and SPX options. One of the things I do on a daily basis in my personal trading is to manage an ever-evolving delta-neutral-ish position in the S&P 500.

And in recent weeks, I’ve jumped into the deep end of the liquidity pool that is daily expiring options.

There appear to be attractive opportunities here.

I know many traders are attracted to the low cost of these options for purposes of buying simple long calls or puts and looking for a quick hit-and-run trade with easily definable risk (can’t lose more than I pay for the option).

If that works for you, great!

The way I’m approaching them is from a premium-selling angle. Options with less than 21 days to expiration are in the sweet spot for theta decay if I’m short the options. And theta decay is in hyperdrive once we start getting inside a week until expiration.

Of course, nothing is easy. For one thing, we can’t trade these short options naked. The margin requirements for retail traders are far too onerous for the amount of gain we’re hoping to achieve. For example, in an IRA account, to sell one at-the-money SPY call expiring today would require approximately $40,000 in margin! Are you kidding me? That covers a 400-point move in SPY — in less than one day of trading. It’s less in a margin account (approximately $8,000) but still too large given the real theoretical risk in the position.

If we want to be short premium, we have to do it via some kind of spread where our risks are defined. My preferred vehicle has been simple debit and credit vertical spreads.

Anyway, I’m curious if any of you have been dabbling in this new wild west of options trading. Has your hidden day trader come out of the closet? Mine has, big time. Let me know what’s working or not working for you.

If you’re interested, click on the link in the tweet below to hear a recording of our spaces conversation from yesterday:

Who’s trading 0-DTE options?

What works? What doesn’t?

What should we know? What should we avoid?

Spread the word. I’m curious to hear and learn from people who are successfully (or not) trading 0-DTE options daily. https://t.co/CqHoD89F2F

— Sean McLaughlin, NLD 📈 ( formerly @chicagosean) (@OptionsSean) March 20, 2023

If I can get some of you to participate live in these calls, I’ll host more of them. Let me know!

Trade 'em Well,

Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research

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