Zero-day-to-expiration options (0DTEs) are Wall Street’s latest boogeyman. The professionals are worrying, and the financial media is doing its best to make you worry too.
MarketWatch was among the first to sound the alarm: “A potential stock-market catastrophe in the making: The popularity of these risky option bets has Wall Street on edge.”
Forbes gave it a cute name: “What Is Volmageddon? Why Record Options Trading Could Risk Another 20% Stock Crash.”
A recent Bloomberg article can leave us wondering if it’s even worth the effort to trade these options. That headline was: “Day Traders Lose $358,000 Per Day Gambling on Zero-Day Options.”
You wouldn’t think this from reading those headlines, but 0DTEs are no threat to the market. They’re actually an opportunity.
While I don’t usually recommend 0DTE options to my subscribers, I do recommend short-term options trades (anywhere from a couple hours to one day) every day in my Trade Room. And since the start of April, we’ve made money on four of every five trades using this strategy.
I’d like to invite you to take part in this strategy. But before I do, allow me to debunk the latest pearl-clutching fear from the financial media…
Because trading 0DTE options is no more a threat to the market than trading a share of stock is. And the sooner you understand that, the closer you are to cutting out the noise and start making money.
Why 0DTEs Won’t Cause Volatility
A 0DTE is simply an option that has zero days until expiration.
All options expire. That means that every option is eventually a 0DTE, and there have been 0DTEs since the first options were traded hundreds of years ago.
Of course, the concern is that there are now short-term options that expire every day. Right now, no matter what day you’re reading this, you can buy a 0DTE option on the SPDR S&P 500 ETF (SPY) that expires at the next close.
The worry is that this creates volatility. The problem with that is, options don’t create volatility by themselves.
SPY options prices are determined by the price of SPY. If SPY goes up, call options on SPY go up. Likewise, puts on SPY increase in value when the price of SPY falls. So, options cannot cause volatility any more than a share of SPY can cause volatility. Options simply mimic the behavior of investors, while also amplifying it.
The latest concerns of volatility come from a 2018 market crash that was caused by options on the VIX index, a measure of volatility based on … the price of options.
You can see the problem. It was a circular relationship — as options prices moved, so did VIX … and that caused options prices to change, which affected the VIX … and so on. There was nothing real within the circle to anchor values, so volatility got out of hand and spooked investors, causing a crash.
0DTEs outside of the VIX are nothing like that. They’re tied to stock prices, not mathematical formulas like the VIX is based on. This means market makers can use put-call parity to hedge risks, leaving little chance of a market crash caused by 0DTEs.
So far, I’ve been a little technical. You might even feel overwhelmed.
But the good news is you don’t need to understand how options work to benefit from them…
This 15-Minute Trade Beat SPY and QQQ Last Month
Every morning, we trade a strategy that works only because 0DTEs exist. We do that in our Precision Profits Trade Room.
The market opens at 9:30 ET every morning. At 9:46 ET, we measure the opening range of SPY and the Invesco QQQ Trust (QQQ).
We use that to define potential breakout levels. If the price of SPY or QQQ moves through a breakout level, we trade an option expiring the next day. Technically, this is a one-day-to-expiration option, but those options wouldn’t be trading if exchanges hadn’t created 0DTEs.
The reason I recommend one-day options is because some brokers don’t allow everyone to trade 0DTEs. And I want this strategy to be accessible to everyone.
This is an active trading strategy. Since the beginning of April, we’ve had 23 trades. Nineteen were winners — an 82.6% win rate.
If you had bought one option contract in each trade, winners and losers, you’d have a gain of 24.5%. That’s based on the difference between the sales price and buy price of each contract. The total profit is $1,121. (Both SPY and QQQ are flat over the last month, by comparison.)
Options are relatively inexpensive. The most expensive position cost $274 to open. Of course, you need more than that amount to trade this strategy. There really is no right amount, but it’s possible to start with just a few thousand dollars.
Hedge fund traders have used strategies like this for decades. They traded futures markets to take advantage of short-term moves. However, most individual investors shouldn’t trade futures because of the risks.
0DTE options level the playing field and allow individuals like us to trade this hedge fund strategy with a reasonable level of risk. That’s why I can’t take all the concerns about 0DTE options seriously. More likely, directing individual traders away from 0DTE options is a way to suppress their moneymaking potential.
I invite you to ignore this fearmongering from the institutional traders and the financial media. You can certainly make money trading 0DTE options, and you don’t need to worry about causing volatility by doing so.
For proof, look no further than my daily live Trade Room.
I’ve worked hard this year to foster a welcoming, collaborative and open-minded community of traders in my daily Trade Room. Viewers can follow along with my strategy after the opening bell every single morning, and connect with other subscribers at the same time.
I’m opening up access to my Trade Room right now, for the first time since we initially launched it in March. If May is anything like April, you won’t want to miss another session. All the information is right here.
Regards,Michael CarrEditor, One Trade
What’s the U.S. Treasury Up To?
Eyes were on Federal Reserve Chair Jerome Powell on Wednesday, as we were all anxious to see whether he would raise rates. Not to mention what his outlook for future hikes would be.
In case you missed it, I can sum it up. He raised the Fed funds rate from 5% to 5.25% and signaled that future hikes would be “data dependent.” The consensus is that a pause in rate hikes might be in order.
We shall see. But I’m more interested in what the U.S. Treasury is up to.
The next month promises to be a wild one. June 1 is the supposed “drop dead” date for a debt ceiling deal. We’ll see what financial gymnastics Treasury Secretary Yellen has to do in the event we cut it close.
But looking further out, it seems the Treasury is already looking past the debt ceiling fiasco and planning … wait for it … buybacks!
You’re likely familiar with stock buybacks. When companies find themselves with excess cash on hand and nothing pressing to spend it on, they will often buy and retire some of their outstanding common stock.
When done the right way — with excess cash and at good prices — buybacks are fantastic for investors. Earnings are spread across fewer shares, raising the earnings per share for all that remain.
And steady buying by the company creates gentle pressure. This often pushes the shares higher, while also adding liquidity.
Of course, there’s also the “other” way to do buybacks. It involves borrowing heavily and paying no attention to the price being paid.
The motive there is usually hiding share dilution from excessive executive stock options. Unscrupulous management teams will use the shareholders’ money to “mop up” the extra shares they create to pay themselves.
So, which kind of buyback is Ms. Yellen up to?
It’s a bit of a mix. Our government has been running budget deficits for my entire life, minus four brief years under Bill Clinton in which we ran surpluses.
So the Treasury is not shrinking our debt pool by any stretch of the imagination. The Congressional Budget Office expects to add $1.4 trillion to the deficit this year alone.
That said, Yellen’s move is a smart one.
The official statement for the buyback is that it “adds liquidity” to the market. In other words, investors looking to sell their Treasury bonds will have an easier time doing so if the Treasury is doing the buying.
But I think there’s another motive too.
Some long-dated Treasurys are down 15% to 20%, or even more after a year of rising rates. The Treasury can effectively retire some of that debt at a discount.
Think of it like this. The Treasury can borrow a million dollars with a new bond issue, and then retire a million dollars’ worth of outstanding debt for, let’s say $800,000. In this hypothetical example, they’d have a $200,000 “profit” to spend elsewhere.
Make no mistake. They will find a way to waste it. Our government is good at that.
But if there is any takeaway here, it would be that long-term Treasury yields might have a floor going forward. There is a limit to how low long-term yields can go, even in a recession, if there is large-scale buying by a whale like the U.S. Treasury.
In his latest research, he discovered a neglected area of the market that institutional investors just can’t trade in, due to an arbitrary SEC rule. But we can certainly profit from it.
Adam’s free webinar, “The $5 Stock Summit,” explains how a select group of stocks trading at $5 or less have the potential to make 500% gains or more over the next year.
Interested? Just go here for more details.
Regards,Charles SizemoreChief Editor, The Banyan Edge