Zero-Day Options: Managing Winners Intraday

Key Concepts

• Zero-Day Options
• SPX Puts/Put Spreads
• Selling Credit Spreads
• Delta
• Profit Targets (10%, 20% of Max Profit)
• Intraday Management/Reloading
• Trade Occurrences
• Average P&L (Profit and Loss)
• Win Rate
• Market Directionality (Bullish Market)
• Volatility
• Capital Redeployment
• Risk Management (Defined Risk)
• Discipline

Performance of Selling SPX Puts (Zero-Day)

This section of the discussion analyzes the performance of selling zero-day SPX put spreads, focusing on the effectiveness of closing winning trades early and initiating new ones within the same trading day. The data set spans over two and a half years of SPX zero-day option activity.

Methodology and Data Collection

• Data Duration: Over two and a half years of data for zero-day SPX options.
• Data Granularity: Data collected every 10 minutes.
• Initial Trade Setup: Each day begins by selling a $10 wide put spread with at-the-money (ATM) short strikes at approximately 9:00 a.m. Central Time (30 minutes after market open).
• Early Profit Taking: Trades that reached 10% of their maximum profit were closed.
• Reloading Strategy: Upon closing a winning trade, a fresh put spread was immediately sold with adjusted strike prices. This is described as an "intraday roll" or "reloading" strategy.
• Focus of Analysis: The analysis specifically examines the performance of these second trades initiated after an early win.
• Time Bracketing: The second trades are analyzed based on their entry time: before 10:00 a.m., between 10:00 a.m. and 11:00 a.m., between 11:00 a.m. and 12:00 p.m., and in the afternoon.
• Variations Tested:
  • Closing at 10% of max profit vs. 20% of max profit.
  • $10 wide put spreads vs. $20 wide put spreads.
  • ATM short strikes vs. 25 delta short strikes (further out-of-the-money).

Analysis of Second Trades (10% Profit Target, $10 Wide Spreads)

• Key Finding: Directionally correct trading (bullish in this dataset) has been a significant advantage over the past two and a half years, which has been an "abnormally bullish market."
• Overall Performance: Across all second trades, win rates were consistently high, exceeding 90% across the board.
• Early Morning Trades (Before 10:00 a.m.):
  • High Occurrences: A significant number of trades were initiated and closed before 10:00 a.m. This indicates that the market moved favorably early in the day, allowing for quick profit targets to be met.
  • Market Movement: To achieve a 10% profit on an ATM $10 wide spread (approximately 9 deltas), the market typically needed to move up around 10 points in the first 30 minutes.
  • Average P&L: Around $40 per trade, which is considered solid for a second trade after managing the first.
• Afternoon Trades: Trades placed later in the day generally showed lower average P&L and win percentages. This is attributed to less premium available to sell and potentially increased risk.

Analysis of Second Trades (20% Profit Target, $10 Wide Spreads)

• Profit Target Impact: Increasing the profit target to 20% of max profit resulted in fewer occurrences but a higher average P&L, provided the profit was achieved quickly.
• Win Rates: Win rates remained high, often above 90%, even at this higher profit target.
• 11:00 a.m. - 12:00 p.m. Timeframe: This period showed a dip in performance, potentially due to increased volatility or a shift in market participants (e.g., "DGENs" taking over when liquidity decreases).
• Market Context: The data is heavily influenced by the "abnormally bullish market" over the last two and a half years, with the S&P 500 experiencing significant gains (e.g., from 3,800 to 6,800).

Analysis of Second Trades (20 Point Wide Spreads, 25 Delta Short Strikes)

• Wider Spreads: Using wider ($20) spreads with short strikes at a 25 delta (further out-of-the-money) introduces more total risk.
• Premium Received: Less premium is sold for these wider, further OTM spreads.
• Average P&L: The average P&L per trade is lower compared to ATM spreads, reflecting the wider distribution of outcomes.
• Win Rate: Despite lower average P&L, the win rate remained exceptionally high, reaching 97% and even 98% in some configurations.
• Losses: Losses are described as "tail losses," implying they are infrequent but can be significant when they occur.
• Key Takeaway for Wider Spreads: The primary challenge is withstanding drawdowns and P&L variance. The advice is to use a "tiny amount of capital" and maintain discipline, as greed can lead to significant losses.
• 10% Profit Target on Wider Spreads: This resulted in smaller profit targets (20-40 cents) compared to ATM spreads (60-80 cents), leading to quicker exits.
• 11:00 a.m. - 12:00 p.m. Timeframe: This period continued to show weaker performance for second trades, suggesting it's advisable to wait until the afternoon for these types of trades if initiating them later in the day.

Key Arguments and Perspectives

• Advantage of Early Winners: Managing winning trades early in longer-dated options allows for capital redeployment into fresh trades. This principle is applied to zero-day options, where the market is active throughout the day.
• "Take the Money and Run" vs. Management: There's a discussion about whether to simply take profits and exit or to actively manage and re-enter trades. The speakers express personal preferences for simplicity and peace of mind, suggesting that managing zero-day trades intraday can be anxiety-inducing and potentially "overkill" due to their binary nature.
• Human Element and Limitations: The discussion acknowledges the "human element" in trading, including limited capital, brainpower, and the potential for emotional decision-making (greed).
• Directionality is Key: The overwhelming success of these strategies is heavily attributed to being directionally correct in a strongly bullish market. The presenters emphasize that this shouldn't stop the search for optimal trading methods.
• Intraday Volatility and Timing: The 11:00 a.m. to 12:00 p.m. timeframe is identified as a potentially volatile period with lower liquidity, impacting trade performance.
• Risk Management and Discipline: For wider, out-of-the-money spreads, the ability to withstand drawdowns and maintain discipline is paramount to avoid significant losses, especially when scaling up contract sizes.

Notable Quotes

• "Selling puts selling puts puts or put spreads. That's probably been quite rich. It's been fantastic. It's been pretty rich." (Referring to the historical performance of selling puts).
• "If you knew that in hindsight 2020." (Highlighting the benefit of hindsight in analyzing past trades).
• "So, you're closing one at the money spread or you're opening it on the open. If you get the 10% of the max profit, you close it and start a fresh one." (Explaining the reloading strategy).
• "I think it would give me anxiety because if I have a zero day on, I'm just always just checking the like I'm checking all the time like it's down." (Expressing personal reservations about constant monitoring of zero-day trades).
• "The zero-day option market uh in underlying such as S&P is liquid and active from market open to close." (Highlighting the liquidity of the SPX zero-day market).
• "So, you're targeting like you know 50 60 70 cents depending on what the spread is." (Estimating profit targets for ATM spreads).
• "Being directionally correct is obviously an advantage and over the last two and a half years has been quite uh beautiful here." (Emphasizing the impact of market direction).
• "The first thing that stood out to me was just the number of occurrences placed before 10:00 a.m." (Observing the high frequency of early morning trades).
• "But again, this is just the last two and a half years. Very limited time frame. Abnormally bullish market for a lot of that although we have had some drop too." (Cautioning about the limited scope of the data and market conditions).
• "The main takeaway is that you have to be able to withstand the draw down and that P&L variance." (Crucial advice for trading wider spreads).
• "Get a little greedy, get a little greedy. Why do I close this trade when it's, you know, it's only up and then you get whacked on some of them." (Describing the pitfall of greed in trading).
• "Every day is a new set of opportunities for zero day traders. And when those opportunities pay off, especially quickly, you might even get more than one winner in a morning." (Concluding thought on the potential of zero-day trading).

Technical Terms and Concepts

• Zero-Day Options (0DTE): Options contracts that expire on the same day they are traded. They offer high leverage and rapid time decay.
• SPX: The S&P 500 index.
• Puts: Options contracts that give the buyer the right, but not the obligation, to sell an underlying asset at a specified price (strike price) on or before a certain date.
• Put Spreads: A strategy involving the simultaneous purchase and sale of put options with different strike prices but the same expiration date. A credit put spread involves selling a higher strike put and buying a lower strike put, resulting in a net credit received.
• Delta: A measure of an option's sensitivity to a $1 change in the price of the underlying asset. An ATM option typically has a delta around 0.50. A 25 delta option is further out-of-the-money.
• At-the-Money (ATM): An option whose strike price is equal to the current price of the underlying asset.
• Out-of-the-Money (OTM): An option whose strike price is not favorable for the option holder (e.g., a put with a strike price below the current asset price).
• Max Profit: The maximum potential profit of an option strategy. For a credit put spread, this is the net credit received.
• Profit Target: A predetermined level of profit at which a trade is closed.
• Intraday Roll: The process of closing an existing trade and opening a new one within the same trading day, often with adjusted parameters.
• P&L (Profit and Loss): The financial gain or loss from a trade or series of trades.
• Win Rate: The percentage of trades that result in a profit.
• Drawdown: A peak-to-trough decline during a trading period.
• Variance: The degree of variation of a trading strategy's returns around its average.
• Premium Decay (Theta): The decrease in an option's value over time as its expiration date approaches. This is particularly rapid for zero-day options.

Logical Connections Between Sections

The summary progresses logically from defining the scope of the analysis (Part 3 of a series on selling zero-day puts) to detailing the methodology, presenting specific data-driven results for different trade parameters, and finally synthesizing the key takeaways.

• The initial discussion of Part 1 and Part 2 sets the context for the current analysis, which focuses on managing and reloading trades.
• The methodology section clearly outlines how the data was collected and the specific parameters tested, providing a foundation for understanding the subsequent results.
• The analysis of different profit targets and spread widths builds upon each other, showing how adjusting these parameters impacts performance metrics like average P&L and win rate.
• The discussion of market context (bullish market) is woven throughout the analysis, serving as a crucial explanatory factor for the observed success.
• The key arguments and takeaways directly stem from the data presented, offering interpretations and actionable insights based on the findings.
• The conclusion summarizes the overarching themes and reinforces the importance of directionality, early exits, and disciplined risk management.

Data, Research Findings, and Statistics

• Data Duration: Over 2.5 years of SPX zero-day option data.
• Win Rates: Consistently above 90% across various configurations, reaching as high as 97-98% for wider spreads.
• Average P&L: Around $40 per trade for ATM $10 wide spreads (second trades).
• Early Morning Trade Frequency: A significant number of trades were closed and re-initiated before 10:00 a.m.
• Market Performance: The S&P 500 experienced substantial gains (e.g., 3,800 to 6,800) over the analyzed period.
• Profit Target Impact: Higher profit targets (20% vs. 10%) led to fewer occurrences but potentially higher average P&L if achieved quickly.
• Spread Width Impact: Wider spreads ($20) with OTM strikes resulted in lower average P&L but maintained very high win rates, with losses being "tail losses."
• Time of Day Impact: Trades initiated and closed before 10:00 a.m. were generally more successful than those initiated later in the day, particularly in the 11:00 a.m. to 12:00 p.m. window.

Section Headings

• Key Concepts
• Performance of Selling SPX Puts (Zero-Day)
  • Methodology and Data Collection
  • Analysis of Second Trades (10% Profit Target, $10 Wide Spreads)
  • Analysis of Second Trades (20% Profit Target, $10 Wide Spreads)
  • Analysis of Second Trades (20 Point Wide Spreads, 25 Delta Short Strikes)
• Key Arguments and Perspectives
• Notable Quotes
• Technical Terms and Concepts
• Logical Connections Between Sections
• Data, Research Findings, and Statistics
• Synthesis/Conclusion

Synthesis/Conclusion

The analysis of selling zero-day SPX put spreads over the past two and a half years, particularly focusing on the strategy of closing early winners and reloading, reveals a highly effective approach, heavily influenced by a prolonged bullish market. The data consistently shows exceptionally high win rates (often exceeding 90%) across various profit targets and spread widths. Early morning trades (before 10:00 a.m.) demonstrated a high frequency of successful exits, leading to solid average profits. While wider, out-of-the-money spreads yielded lower average P&L, they maintained near-perfect win rates, underscoring the importance of discipline and capital management to withstand infrequent but potentially significant losses. The 11:00 a.m. to 12:00 p.m. timeframe emerged as a less favorable period for initiating second trades. Ultimately, the success of this strategy is strongly tied to directional accuracy, and while the data from this specific period is compelling, traders are cautioned to consider the market context and maintain robust risk management practices, especially when dealing with the inherent volatility of zero-day options. The ability to redeploy capital quickly after an early win proved to be a key driver of increased daily profits.