0DTE: Iron Fly or Iron Condor? The Data May Help

Zero DTE Performance by Market Action: A Detailed Analysis

Key Concepts:

• Zero DTE (Zero Days To Expiration): Options contracts expiring on the same day they are traded.
• Iron Condor: A neutral options strategy involving the sale of an out-of-the-money call spread and an out-of-the-money put spread.
• Iron Fly: A neutral options strategy similar to an Iron Condor, but with tighter spreads, typically closer to at-the-money.
• Delta: A measure of an option's price sensitivity to changes in the underlying asset's price. (e.g., 20 Delta, 50 Delta)
• Volatility: The degree of price fluctuation of an underlying asset.
• SPX: S&P 500 Index.
• Mid Price: The average of the bid and ask price of an option.
• Wing Spread: The difference in strike prices between the call and put options in an Iron Condor or Iron Fly.
• P&L (Profit and Loss): The financial gain or loss from a trade.
• V Differential: The difference in implied volatility between different expiration months.

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I. Introduction & Initial Market Conditions

The discussion centers around analyzing the performance of Zero DTE (Zero Days To Expiration) options trading strategies based on the market’s opening action. The initial market conditions are volatile, with the E-Mini S&P 500 down approximately one point at the start of the broadcast, later moving to down three points, while the NASDAQ is up 10. A trader successfully executed a scalp trade, closing most of the position but leaving a small runner. The overall market is described as “crazy,” with significant price swings.

II. Study Methodology & Data Set

A three-year study was conducted on Zero DTE SPX options, collecting data every 10 minutes. The study focused on selling premium using Iron Condors and Iron Flies, specifically:

• Short Strikes: Either the 50 or 20 Delta.
• Iron Fly Wings: $10 wide.
• Iron Condor Wings: $20 wide.
• Profit Taking: Closing winners at 20% or 35% of maximum profit.
• Data Analysis: Filtering results based on the size and direction of the S&P 500 move from the market open until trade entry.

III. Defining Market Open Scenarios

The study categorized market openings into four scenarios based on the S&P 500’s movement from the open:

• Large Down Move: A decline of 4% or more.
• Small Down Move: A decline of 0.1% to 4%.
• Flat: Movement of less than 0.1% in either direction.
• Up Opening: A gain of more than 0.1%.

Large up moves were rare and statistically insignificant, with most significant moves occurring to the downside. All trades were assumed to be executed and exercised at the mid-price.

IV. Iron Fly Performance Analysis

• 20% Profit Target: Iron Flies performed better during small or large downside moves, correlating with increased volatility. Average P&L increased in these scenarios. Win rates remained around 50%, but were consistently positive.
• 35% Profit Target: Win percentages decreased due to the higher profit target and increased risk of reaching maximum loss. However, positive P&L was still observed across all scenarios, with downside moves still providing a slight edge. The speaker emphasized that holding positions longer to achieve higher profit targets increases the likelihood of realizing maximum risk.

V. Iron Condor Performance Analysis

• 20% Profit Target: Iron Condors demonstrated exceptional performance, with a 90% win rate, significantly exceeding expectations. They outperformed in flat or up openings. The speaker attributed this to a “snapback” effect, where volatility contracted after an initial downside move.
• 35% Profit Target: Average P&L decreased across the board due to the increased risk associated with the wider profit target.

VI. Volatility & Market Commentary

Throughout the discussion, the market continued to move significantly, with the S&P 500 rising to up 18 points and eventually up 27 points. Volatility remained elevated, with the VIX (implied volatility) around 20.30, despite the market rally. The speaker noted that volatility hadn’t decreased as much as expected given the market’s upward movement, suggesting potential for continued elevated volatility. The discussion touched on tariff news and its impact on market sentiment, with the uncertainty surrounding potential actions by President Trump contributing to sustained volatility.

VII. Key Takeaways & Trading Recommendations

• Opening 30 Minutes: The first 30 minutes of trading are often chaotic and skewed towards downward movement.
• Zero DTE Premium Selling: Not for the faint of heart, with win rates around 50% or slightly below.
• Flat Open Strategy: Iron Condors tend to perform better during flat openings.
• Downside Move Strategy: Iron Flies may be more suitable for small downside moves.
• Volatility Consideration: The opening action between 8:30 and 9:00 AM can help inform the choice of Zero DTE strategy.
• Delta Selection: Further out-of-the-money options (20-30 Delta) may be preferable to at-the-money options in volatile environments.
• Rolling Positions: Rolling positions to the next expiration month (e.g., from March to April) can be a prudent move, especially if the V differential is favorable.

VIII. Final Remarks & Future Outlook

The discussion concluded with a focus on capitalizing on elevated volatility and adapting strategies based on market conditions. The speaker suggested selling delta-neutral strangles in SPY and QQQ with a focus on volatility play. He emphasized the importance of concentrating on current market conditions rather than speculating on future events like tariff resolutions. The overall sentiment was cautiously optimistic, with an expectation of continued two-sided action and elevated volatility in the near term.

Notable Quote:

“Selling at the money zero DT premium isn't for the faint of heart. Win rates were not great. You were, you know, at 50% or slightly below that.” – Speaker.