Most Traders Place 0DTE Trades. Liz and Jenny Explain Why the 1DTE Version Works Better.

Key Concepts

• SPX (S&P 500 Index): A cash-settled index, meaning no physical stock ownership is required upon expiration.
• Zero DTE (0 Days to Expiration): Options contracts that expire on the same day they are traded.
• One DTE (1 Day to Expiration): Options contracts that expire the following trading day.
• Broken Wing Butterfly (BWB): A neutral-to-directional options strategy that involves buying one option, selling two at a different strike, and buying one further out, where the wings are not equidistant from the center strike.
• Expected Move: The range within which the market is statistically expected to trade by a certain expiration, used to determine strike selection.
• Cash Settlement: A feature of SPX options where the difference between the strike price and the settlement price is paid in cash, eliminating the risk of assignment of underlying shares.

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1. Strategy Overview: The Broken Wing Butterfly

The video discusses using Broken Wing Butterflies (BWB) on SPX options as a directional bet. While the strategy can be applied to both the upside and downside, the speakers focus on the downside BWB. The primary appeal of this strategy in the SPX is that it is "set it and forget it," requiring no active management due to the nature of cash settlement and the small amount of credit collected.

2. Mechanics and Methodology

The speakers outline a specific framework for setting up the trade:

• Strike Selection: The trade is centered around the "expected move" of the underlying asset.
• Structure:
  • Buy one option at the expected move.
  • Sell two options at a lower strike (the "body").
  • Buy one option further out (the "wing").
• Breaking the Wing: The "broken" aspect refers to the distance between the strikes. By widening the distance between the second and third legs, traders can increase the credit received, though this also increases the total risk.
• Example Setup:
  • 0 DTE: A $10-wide spread (e.g., 95 to 80) might only yield 20 cents, which the speakers deem insufficient. They suggest adjusting the width to capture more premium (e.g., 55–60 cents).
  • 1 DTE: A $5-wide spread (e.g., 85, 80, 70) can collect approximately 55 cents.

3. Management and Exit Strategy

A recurring theme is the lack of active management required for this strategy:

• "Set it and Forget it": Because the credit collected is small, the speakers argue that active management is unnecessary. The goal is for the market to "meander" into the center of the butterfly.
• Psychological Aspect: Traders often get nervous as the underlying price approaches the short strikes. The speakers advise that if a trader feels the need to manage the trade, they should instead use a standard put spread, which allows for rolling in time—a luxury not available with 0 DTE/1 DTE butterflies.
• Winning Management: The only exception to the "no management" rule is if the trade is highly profitable ("a high-class problem"). In this case, one might buy back the lower wing to remove risk and leave the remaining structure as a standard butterfly.

4. Key Arguments and Perspectives

• SPX Advantage: The speakers emphasize that SPX is superior to SPY for this strategy because SPX is cash-settled. There is no risk of being assigned stock, regardless of how far "in the money" the trade goes at expiration.
• Risk Definition: The risk is strictly defined at order entry. Even if the market "blows through" the strikes, the loss is capped by the structure of the butterfly.
• Attribution: The speakers credit Mike Butler for the downside BWB strategy in 1 DTE SPX, noting that while they prefer a conservative risk profile, the strategy is highly effective.

5. Synthesis and Conclusion

The Broken Wing Butterfly in SPX 0/1 DTE is presented as a low-maintenance, defined-risk strategy suitable for traders looking to capitalize on directional moves without the stress of active management. The core takeaway is that the strategy relies on the statistical probability of the market landing within a specific range. Because the credit collected is relatively small, the trade is best treated as a passive position where the trader accepts the defined risk at entry and allows the cash-settlement process to handle the expiration, rather than attempting to "trade out" of the position.