0DTE Strategy Outcomes

Are Zero-Days-to-Expiration (0DTE) options attractive trading vehicles? In his November 2023 paper entitled “0DTE Trading Rules”, Grigory Vilkov surveys outcomes for popular strategies that each day take unhedged positions in cash-settled 0DTE options on the S&P500 Index and hold to expiration. He considers simple trading rules that open positions at a fixed time (10:00 in the main analysis and 13:00 and 15:00 in additional tests) and hold to expiration at 16:00. He augments available prices by interpolation to construct test data for moneyness from 0.98 to 1.02 in 0.00125 increments. He then computes profit/loss statistics for both standalone calls and puts and for selected option strategies, including: at-the-money (ATM) straddles; strangles; bull call and bear put spreads; call and put ratio spreads; and, risk reversals. Excepting the straddle, he considers several combinations of strikes, from in-the-money (ITM) to out-the-money (OTM). He also estimates the variance risk premium as the implied variance minus realized variance while positions are open. Using 0DTE option 30-minute price data during September 2016 through May 2023, he finds that: (more…)