Impatient Bulls: Selling Zero DTE Puts - Part 2

Key Concepts

Zero DTE (Zero Days to Expiration) Options: Options contracts that expire on the same day they are traded.
Put Spread: A strategy involving selling a put option and buying another put option with a lower strike price, typically used to profit from a decline in the underlying asset's price while limiting risk.
Delta Neutral: A trading strategy designed to be unaffected by small movements in the price of the underlying asset.
DTE (Days to Expiration): The number of days remaining until an option contract expires.
Profit Target: A predetermined level of profit at which a trade will be closed.
Maximum Drawdown: The largest peak-to-trough decline in the value of an investment or trading account.
GTC (Good 'Til Canceled) Order: An order to buy or sell a security that remains active until it is executed or the trader cancels it.
VIX: The Chicago Board Options Exchange Volatility Index, a measure of the stock market's expectation of volatility based on S&P 500 index options.
Iron Fly: A strategy that involves selling both a put spread and a call spread with the same expiration date and strike price for the short options.

Part Two: Impatient Bulls Selling Zero DTE Put Spreads

This video is the second part of a series focusing on selling zero DTE put spreads, building upon previous research. The primary objective is to explore different exit mechanics for these trades to replicate the profit-taking strategies used in options with 45 to 21 DTE.

Study Methodology and Design

The study analyzed over two and a half years of data from zero DTE SPX options, with data collected every 10 minutes. The core of the research involved selling one $10 wide put spread daily at approximately 9:00 a.m. Chicago time. The study compared various profit targets, ranging from 10% to 50% of the premium collected. Crucially, it contrasted two exit scenarios:

Early Exit (Noon): Traders who closed all positions at noon, regardless of whether the profit target was met or if the trade was a loser.
End-of-Day Exit: Traders who left positions open until expiration if the profit target was not achieved.

The analysis focused on key metrics: the total number of winning trades, total profits and losses, and maximum drawdown. All trades were assumed to exercise at mid-price, and all times were Chicago-based.

Analysis of 50 Delta Put Spreads

The initial analysis focused on selling a 50 delta put spread, which is $10 wide.

Premium Collection: A $10 wide put spread with a 50 delta typically yielded between $3.20 and $4.00 in premium. For instance, on a specific morning with the VIX at 16, a 50 delta, $10 wide put spread collected $3.85.
Risk: With a premium of $3.85 on a $10 wide spread, the risk was approximately $6.15. This risk figure represents the maximum potential loss if multiple consecutive trades were unsuccessful.
Profit Targets and Exit Strategies:
- Letting it go to Expiration (No Profit Target Hit): For a 35% profit target, the average P&L per trade was $63.92, with a win rate of 84%.
- Closing at Noon (If Profit Target Not Met): When the same trade was closed at noon if the profit target wasn't hit, the average P&L per trade increased to $73.83, and the win rate jumped to 91%. This strategy showed a significant improvement in win percentage.
- 50% Profit Target: This target yielded the highest average P&L per trade ($82.92) but with a slightly lower win rate.

The study highlighted that all tested profit targets for the 50 delta put spread resulted in profitable trades. The decision between profit targets and exit strategies was presented as a "menu" based on individual risk tolerance.

Analysis of 30 Delta Put Spreads

The study then shifted to examining 30 delta put spreads, also $10 wide.

Premium Collection: A 30 delta, $10 wide put spread collected a premium of $1.85.
Risk: With a premium of $1.85, the risk was approximately $8.15, higher than the 50 delta spread.
Profit Targets and Exit Strategies (Comparing 35% Profit Target):
- Letting it go to Expiration (No Profit Target Hit): The win rate was 92%, and the average P&L per trade was $41.
- Closing at Noon (If Profit Target Not Met): The win rate increased to 95%, and the average P&L per trade rose to $57.92.

The 30 delta spreads generally exhibited higher win percentages across the board. The speakers emphasized that even with a lower average P&L compared to the 50 delta spreads, the higher win rate was appealing, especially for smaller accounts.

Key Arguments and Perspectives

The "Native are Restless" Phenomenon: As traders scale up their positions, the psychological pressure to manage risk and avoid maximum losses increases. This leads to a consideration of taking profits or cutting losses earlier.
The Advantage of Noon Exits: The data strongly suggests that mechanically closing trades at noon, if the profit target hasn't been met, leads to a higher win percentage and a higher average P&L per trade, particularly for the 50 delta put spread. This strategy also resulted in the lowest maximum drawdown in some scenarios.
Profit Target vs. Win Rate Trade-off: The study presented a clear trade-off: higher profit targets generally led to higher average P&L but potentially lower win rates, while lower profit targets (like 10%) were insufficient for single-sided put spreads. The 30 delta spreads offered a higher win rate, while the 50 delta spreads offered higher P&L.
Directional Bias and Market Conditions: While Tasty traditionally focused on delta-neutral trades, the steady upward movement in the S&P 500 has prompted a closer look at bullish strategies. The study noted that in a rising market, short puts were often winners regardless of management, especially out-of-the-money ones.
The Inadequacy of 10% Profit Target for Single-Sided Trades: The research indicated that aiming for only 10% profit on a single-sided put spread was not a successful strategy. However, when combined in a two-sided trade (like an iron fly), 10% could be a viable profit target.

Notable Quotes and Significant Statements

"The steady upward movement in S&P, however, is leading us to look more closely into being bullish in these extremely liquid markets."
"So basically this is the key sentence here. Put the trade on at around 9:00 a.m. give or take 5 minutes and either and you put in your your closing order to take profits. But if they don't close, if you don't hit your win, then you close the trade at noon or you let it go to expiration. That's what we're comparing. What's better?"
"The natives are restless, folks. The natives are restless." (Referring to the psychological pressure of managing larger positions).
"Every little bit that you do can move your needle farther in your trading."
"So if you look for the the highest average P&L, the highest average P&L is at that 50 delta put spread. Selling the 50 delta put, making a $10 weight spread and closing at 50%. That's the highest. It's got the highest P&L and the lowest draw down across the board."
"Now, if someone wants to hang their hat on the highest win percent, the highest win percent is going to be here at this um 30 delta spread, you've got a 97% win rate."

Technical Terms and Concepts Explained

Delta: A measure of an option's price sensitivity to a $1 change in the price of the underlying asset. A 50 delta option is expected to move $0.50 for every $1 move in the underlying.
Put Spread Width: The difference between the strike prices of the sold and bought put options. In this study, it was consistently $10.
Premium Collected: The amount of money received by the seller of an option contract.
Risk: The maximum potential loss on a trade. For a put spread, it's the width of the spread minus the premium collected.
P&L (Profit and Loss): The financial gain or loss on a trade.
Win Rate: The percentage of trades that result in a profit.

Logical Connections Between Sections

The video progresses logically by first establishing the study's methodology and then applying it to different scenarios. The comparison between 50 delta and 30 delta put spreads highlights the trade-offs between higher premium/risk and higher win rates. The core comparison of exiting at noon versus letting trades run to expiration is consistently applied across both delta scenarios, allowing for direct evaluation of the impact of different management styles. The conclusion synthesizes these findings to offer actionable insights based on risk tolerance and desired outcomes (highest P&L vs. highest win rate).

Data, Research Findings, and Statistics

Data Source: Over 2.5 years of zero DTE SPX option data, collected every 10 minutes.
Trade Execution: Daily at 9:00 a.m. +/- 5 minutes.
50 Delta Spread (35% Profit Target):
- Letting to Expiration: Avg. P&L $63.92, Win Rate 84%.
- Closing at Noon: Avg. P&L $73.83, Win Rate 91%.
50 Delta Spread (50% Profit Target): Highest Avg. P&L ($82.92), lower win rate.
30 Delta Spread (35% Profit Target):
- Letting to Expiration: Avg. P&L $41, Win Rate 92%.
- Closing at Noon: Avg. P&L $57.92, Win Rate 95%.
30 Delta Spread (Highest Win Rate): 97% win rate, with an average P&L of $40 per day (for one $10 wide spread).
10% Profit Target: Unsuccessful for single-sided put spreads, but viable for two-sided trades (iron fly).

Section Headings

Introduction and Study Overview
Methodology and Data Collection
Analysis of 50 Delta Put Spreads: Profit Targets and Exit Mechanics
Analysis of 30 Delta Put Spreads: Profit Targets and Exit Mechanics
Key Takeaways and Strategic Implications
Conclusion and Future Considerations

Synthesis and Conclusion

This study on selling zero DTE put spreads, particularly in a bullish market environment, reveals significant advantages to specific exit strategies. While letting trades run to expiration can be profitable, mechanically closing positions at noon if the profit target is not met demonstrably improves win rates and average P&L per trade. For 50 delta spreads, this noon exit strategy leads to a higher win rate (91%) and P&L ($73.83) compared to letting them expire. For 30 delta spreads, the noon exit boosts the win rate to 95% and P&L to $57.92.

The choice between 50 delta and 30 delta spreads depends on individual preferences: the 50 delta offers higher potential P&L, while the 30 delta provides a higher win rate. The 10% profit target is generally insufficient for single-sided put spreads but can be effective in two-sided strategies like iron flies. The research suggests that being more patient and aiming for larger profit targets (like 35% or 50%) is generally more profitable than taking small profits, especially in a trending market. The study concludes that there are viable strategies for various risk tolerances, with the noon exit strategy emerging as a key differentiator for improving performance in zero DTE put spread trading.