Options Q&A: 0-DTE

Sean McLaughlin
March 28, 2023

If you’ve tuned in to either of my “Expiring Daily” Twitter spaces talks over the past two Mondays, you’ve heard me talking about a trading strategy I’m currently in the process of iterating that involves daily expiring options in the S&P 500 options complex ($SPY and $SPX options, specifically).

A thoughtful listener sent me an email with a bunch of questions about it, and I thought my answers to him might be enlightening to some of you who may be tinkering with strategy construction, particularly with short-dated, high-gamma options.

As I told the emailer, I can answer questions as of my thinking RIGHT NOW. But please know this is a work-in-process, and I’m continually tweaking my entry/exit/adjustment parameters as I learn more.

Here was our conversation:

How far out do you go with expiration? Only 5 days? Ever consider opening spread with 10 DTE?

I’m currently entering new positions with 14 DTE (10 trading days). That’s as far out as they currently list consecutive daily expirations in SPY.

Do you let your vertical spread expire worthless or do you close it for $.05?

For my short put vertical spreads, I leave a resting order to close the short option down for 20 cents. For my long put vertical spreads, I leave a resting order to close the entire spread down for 20 cents less than full value. If I were trading SPX, I would let these expire since they cash settle. But since SPY does not, I exit with a little premium left.

Do you typically go with the 25-delta strike for your short leg in a vertical spread?

No. The short option is the ATM (50-delta) strike. The long option strike is the strike that is just outside the expected range – which roughly corresponds to the 25-delta strike on a credit spread and the 75-delta strike on a debit spread, but not always.

Do you go with a $5-wide spread or $10?

The width of the spread is determined by the expected range (see previous answer).

Since the dividend date has passed, is there still a risk of getting assigned if you opened a vertical call spread?

Yes, there is always a risk of getting assigned against any ITM short option that has very little premium left in it. (This is another reason why I will be migrating this trading to SPX as soon as I’m comfortable, as early assignment is not a risk in cash-settled options).

You mentioned butterfly…if you have a vertical put spread every day for the next 10 days for example, where does the butterfly come in?

The butterfly PnL profile is the result of combining numerous debit and credit vertical spreads together. In general terms, I’m adding put debit spreads when SPY is falling, and adding put credit spreads when SPY is rising. Over time, the position takes on a put butterfly PnL profile.

Does the trend of SPY matter in your decision to open trade?

Yes, see the answer above. Essentially, I’m trend following the SPY. In general terms, every $1 SPY goes up, I’m adding a new put vertical credit spread. Every $1 SPY goes down, I’m adding a new put vertical debit spread. The timing/criteria for entries is a little more nuanced than that, and there is certainly room for improvement here. This is where much of my experimentation is currently focused.

Trade 'em Well,

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

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