Zero-Day Options (0DTE): How They Work, Why They're Popular, and the Data Behind the Hype

#How Options Evolved: From Risk Management to High-Stakes Plays

Originally, options were used by institutional investors to hedge risks or to speculate in a controlled manner. The Chicago Board Options Exchange (CBOE), founded in 1973, allowed the first standardized options contracts to be traded on public markets. Prior to this, derivatives markets existed in agricultural commodities, where options allowed farmers to lock in prices for their crops in the face of unpredictable weather.

In the 1990s, technological innovations made options trading more accessible. The advent of online trading platforms like E*TRADE allowed retail investors to trade options from their computers, opening the door to a new era of participatory finance. However, options were still seen as a sophisticated product requiring deep knowledge and financial resources.

The big game-changer, however, came in the 2010s with platforms like Robinhood, which eliminated commissions and gamified investing. This made options trading more accessible to younger, less experienced traders, many of whom were drawn to the idea of making quick, high-reward trades. As retail traders began flocking to the options market, the introduction of 0DTE options in the late 2010s further accelerated this trend.

According to recent data from the Options Clearing Corporation (OCC), 0DTE options have become an increasingly dominant force in the market. In 2023, 0DTE options accounted for nearly 50% of all S&P 500 options contracts traded on a given day. This is up from just 10% in 2020. The allure of instant, high-stakes profits, combined with the short expiration times, has made 0DTE contracts one of the most active and talked-about areas in finance.

#Understanding 0DTE Options: What Are You Actually Trading?

A 0DTE option is a financial contract that expires within the same trading day. Traders can buy or sell these options on major indices such as the S&P 500, or on individual stocks. The strike price of the option is set based on the current price of the underlying asset, and if the market moves in the direction the trader has bet on, they stand to gain a significant percentage return—often in a matter of hours or even minutes..

The basic anatomy of a 0DTE can look like the following:

1. Market Open

   SPY is trading at $450 at the start of the day.

2. The Purchase

   A trader buys a 0DTE call option with a $453 strike price for $1.00 per contract (costing $100, as each option covers 100 shares).

3. Market Moves

   If SPY rises to $455, the trader might sell the option for $2.00 per contract, doubling their investment.

4. Expiration

   If SPY stays below $453, the option expires worthless, and the trader loses the $100 premium.

The attraction of 0DTE options lies in their ability to magnify price movements. A 1% shift in the underlying asset could translate into a 10% return or more on the option itself. But there's a significant downside: as expiration nears, the time value of the option rapidly decays (a phenomenon known as 'theta decay'), meaning a slight unfavorable movement in the underlying asset can result in a quick and total loss of the premium.

Some may choose to 'exercise' an option, meaning taking action to buy (for a call) or sell (for a put) the underlying asset at the strike price. For example, if you own a call option with a $450 strike price on SPY, and SPY is trading at $455, you could exercise the option to buy shares at $450, locking in a $5 per share profit. However, exercising 0DTE options is rare. These contracts are primarily used for speculation rather than acquiring or selling shares. According to the OCC, over 90% of 0DTE options are closed or expire worthless, underscoring their role as speculative instruments.

#The Rise of Zero-Day Options: Financial FOMO Hits New Heights

0DTE options have become more popular for several reasons. One factor is the increase in market volatility, which creates larger price swings—particularly around major economic events like Federal Reserve meetings, earnings announcements, or geopolitical news. These events can provide short-term traders with the chance to profit from rapid price movements, but they also create significant risk.

According to a 2023 report by the OCC, retail traders account for roughly 25% of all options contracts, with a significant portion of that volume in 0DTE options. The key reason behind this growth is that 0DTE options allow traders to make big bets on the outcome of a specific event, with the potential for outsized returns in a short period. With platforms like Robinhood making options trading easier and more accessible, retail traders have flocked to these instruments, sometimes with little understanding of the risks involved.

Data from Cboe Global Markets shows that, in 2023, 0DTE options accounted for roughly $1.2 trillion in notional volume, highlighting their massive growth. This is partly fueled by algorithms and high-frequency trading (HFT) strategies, which dominate the options market. Institutions and market makers often trade 0DTE options to profit from the volatility and market inefficiencies created by retail traders.

But the explosive rise of 0DTE options trading isn’t occurring in a vacuum — it reflects broader societal trends in speculative behavior. Over the past few years, activities like sports gambling and cryptocurrency meme-coin trading have surged, reshaping how people approach risk and reward. Sports gambling has seen massive growth in the US, particularly after the 2018 Supreme Court ruling that lifted federal restrictions on sports betting. By 2023, the American Gaming Association (AGA) reported that legal sports betting revenue exceeded $10 billion, a 72% increase from just two years earlier. Platforms like DraftKings and FanDuel have gamified the experience, making it easy for everyday consumers to place high-stakes bets from their phones. This cultural shift has bled into financial markets. Similar to betting on a football game, 0DTE options trading allows participants to make quick, high-risk bets on market movements, with outcomes often decided within hours. The appeal of 'instant gratification' is strikingly similar in both domains, as traders seek rapid wins with relatively low upfront costs.

#0DTE Trading Scenarios: The Good, the Bad, and the Ugly

Let’s take a closer look at two real-world scenarios: one where everything goes right, and one where everything goes wrong.

Scenario 1: The Winning Trade - Meet Alex, a retail trader who's been watching the S&P 500 for signs of a post-Fed meeting rally. The Fed has just announced a surprise rate pause, and Alex believes the market will surge as a result. He decides to buy a 0DTE call option on SPY with a strike price of $450.

1. Entry

   Alex buys ten SPY 0DTE call options for $0.70 per contract (representing 700 shares, so $700 total).

2. Market Moves

   After the announcement, SPY jumps 1.5% in just two hours, reaching $455. The value of Alex’s option climbs to $2.50 per contract, giving him an opportunity to sell.

3. Exit

   Alex sells all of his call options for $2.25 per contract (for a total of $2250), netting a $1550 profit on his initial $700 investment.

In this case, Alex benefited from both the correct market direction and good timing. He captured a solid return in a short period, proving that it’s possible to profit with 0DTE options—if the market moves in your favor and you’re quick enough to act.

However, Alex knows he got lucky. 0DTE options are extremely volatile, and even a small shift in the market can lead to devastating losses. Timing is everything, and luck is often mistaken for skill.

Scenario 2: The Losing Bet - Let’s look at Liam, another retail trader, who’s betting on a market decline. The S&P 500 is hovering around $450, and Liam believes that a disappointing announcement from a major tech companing is looming on the horizon that will cause a market drop. He buys a 0DTE put option on SPY with a strike price of $448.

1. Entry

   Liam buys ten SPY 0DTE put options for $1.20 per share (a $1200 premium for 100 shares).

2. Market Moves

   The earnings report comes out, but the company beats expectations, and SPY rises to $455 instead of falling. Liam’s option starts to lose value rapidly due to both the adverse price movement and time decay.

3. Exit

   By 3:30 PM, Liam’s option is worth $0.00, and it expires worthless by the close of the market at 4:00 PM. He’s out $1200, a total loss on the trade.

In this case, Liam lost money because of two major factors: the market did not move in his favor, and time decay ate away at the value of his option. The rapid expiration of the contracts meant there was no time for the market to reverse direction, leaving him with ten worthless contracts.

#The Risks of 0DTE Options: Why Most Retail Traders Lose

As seen in the above scenarios, the high-risk nature of 0DTE options means that traders are likely to experience significant losses if they don’t time their trades perfectly. While the potential for high returns is there, the chances of success are slim.

Data from studies conducted by the CBOE suggests that more than 80% of 0DTE options expire worthless, with the majority of those trades being made by retail investors. This is due to the nature of the product itself: as time runs out, the price of an option is increasingly dependent on the underlying asset’s movement. When combined with the rapid decay of value, this makes it difficult to hold onto profits—or even break even—on the majority of 0DTE trades.

Market makers, hedge funds, and other institutional players are often the beneficiaries of this dynamic. They have the technological infrastructure and deep pockets to profit from small price movements and high-frequency trades, often exploiting the inefficiencies created by retail traders. Retail traders, on the other hand, are at a disadvantage because they typically lack the resources or speed to compete with these institutional players.

#A High-Stakes Game

0DTE options are the epitome of a high-risk, high-reward trading instrument. For seasoned traders who thrive on volatility, they can offer opportunities to profit from swift market movements. However, for the average retail investor, they often function more like a casino—where the odds are stacked against them, and the house (market makers) usually wins.

The data is clear: most 0DTE options expire worthless, and retail traders, in particular, tend to lose money on these contracts. The rapid time decay, combined with the need for precise timing and market direction, makes them one of the riskiest instruments available. As the adage goes, 'It's not timing the market, but time in the market,' and 0DTEs flip that philosophy on its head.

For those enticed by their potential, it’s essential to tread carefully. Understanding the mechanics, having a clear exit strategy, and limiting exposure to a small portion of your portfolio are all critical for survival in the 0DTE arena.

As alluring as the 'win big or go home' nature of 0DTEs might be, most traders end up only achieving the 'go home' part. For many, these instruments are better left as a spectator sport than a participant's game. After all, the market isn't going anywhere—and neither is the thrill of options trading.