Sharing a recent Q&A from our Senior Quantitative Analyst Rocky White
Subscribers to Chart of the Week received this commentary on Sunday, September 17.
While we’ve covered 0DTE options on our site and in this space before, we thought it’d be educational to share a recent Q&A our Senior Quantitative Analyst Rocky White did with Bloomberg. This Q&A is not only a deep dive into the world of 0DTE, but also encompasses the average spread option priced in on the SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (QQQ).
A 0DTE option "Zero Days to Expiration" option or "same-day expiration" option, are a specific type of financial derivative that expires on the same day they are traded. Unlike traditional options that have a longer expiration period, 0DTE options have an extremely short lifespan, typically lasting only a few hours or even minutes.
Looking at SPY options on Wednesday, Sept. 13, White noted the call and put for each expiration date that was priced nearest $1. The prices were taken about five minutes before the close. The spread on the 0DTE options (expiration date of Tuesday, Sept. 12) was 5.8%, while the spread on the options at other expirations were closer to 1%. Based on this, 0DTE options have higher spreads. For the QQQ, White also saw higher spreads on the options expiring Sept. 12. Below is an excerpt of some of White’s methods.
Q: Why did you decide to use the last 5 minutes of trading for your calculations?
RW: We don’t have a database of historical intraday option prices so we can’t look at prices as of noon or 1pm, etc. We have end of day bid/ask data on options. It’s not the exact last minute. Instead, the prices are taken with about five minutes to go to avoid the crazy spreads that occur right at the close. It’s simply all we have access to right now.
Q: Why did you use call and puts at/near expiration of $1?
RW: At first, I looked at the numbers for at-the-money options. When I looked at the SPY options, the 0DTE options had a penny spread. The bid/ask was $0.14/$0.15. That penny spread on a $0.15 option is 6.7%. The spread on the next day expiration was also a penny. It was $1.43/$1.44. That penny spread was a spread of 0.7%. So, the spread was way off simply because the options for the 0DTE options were so much cheaper. Therefore, we decided to look at options that were around the same price. So, I just used the $1.00 options at every strike.
Q: Why do you think the spreads are so high? In high liquid options like this, you’d assume that the bid-ask spreads would be higher.
RW: I believe the spreads are high mainly because it’s so close to expiration. I would really like to see the spreads throughout the day for different strikes and different expirations for comparison. I’m not sure if the spreads would be tighter for 0DTE options than other options even though they are so liquid. With so little time to expiration, the option prices are very sensitive to price movements so hedging them would be a challenge. Since hedging them is difficult, market makers increase the spread.
These options are attractive to traders seeking short-term opportunities, as they allow for quick potential profits or losses based on price movements within the same trading session. Since they have such a short time frame, 0DTE options are often used for day trading and require constant monitoring due to their rapid decay in value as the expiration time approaches.
It's important to note that 0DTE options are generally considered high-risk instruments due to their limited time frame and potential for significant price swings. Traders need to have a solid understanding of options trading and be prepared to manage risks effectively when dealing with 0DTE options.