Zero DTE Spreads: When The Market Moves Against You

Zero DTE Options Study: Performance on Adverse Days

Key Concepts:

• Zero DTE (Zero Days To Expiration): Options contracts expiring on the same day they are traded.
• Delta: A measure of an option's price sensitivity to changes in the underlying asset's price. Lower delta values (e.g., 15, 20) indicate options further out-of-the-money.
• Vertical Spread: An options strategy involving buying and selling options of the same type (calls or puts) with different strike prices but the same expiration date.
• Straddle: A strategy involving buying a call and a put option with the same strike price and expiration date.
• Iron Condor: A neutral options strategy involving selling an out-of-the-money call spread and an out-of-the-money put spread.
• Max Profit: The maximum potential profit from an options trade.
• Drawdown: The peak-to-trough decline during a specific period.

I. Study Overview & Methodology

The analysis, sponsored by SIBO, examined nearly three years of S&P 500 (SPX) zero DTE options data, collected every 10 minutes. The study focused specifically on performance during days when the market moved against the trader’s position. The researchers sold $20-wide vertical spreads, utilizing short strikes ranging from 50 delta straddles to 15 delta strikes. Winners were closed when they reached 15% of maximum profit. The analysis was repeated using 25% and 35% profit targets for confirmation. All trades were assumed to be exercised at the mid-price. The data is based on Chicago time.

II. Performance on Down Days (Put Spreads)

The primary focus initially was on selling put spreads on days when the S&P 500 closed lower. The results indicated a clear trend:

• Delta Impact: Lower delta strikes (15, 20, 25) consistently outperformed higher delta strikes (40, 50) in terms of mean daily Profit & Loss (P&L).
• Profitability Threshold: Profitability didn’t turn positive until the 25 delta strike was used. Selling puts with a 50 delta strike resulted in consistent negative P&L over the three-year period.
• Profit Target Sensitivity: Performance worsened as the profit target increased from 15% to 25% and then to 35% of maximum profit.
• Risk Exposure: Selling puts, even at lower deltas, carried significant risk. The potential loss on a single trade could be substantial (e.g., $1,700 mentioned in the discussion). A 15% profit target required a large number of winning trades to offset a single losing trade (approximately 15 winners to cover one $1,500 loss).

III. Performance on Up Days (Call Spreads)

The study also analyzed selling call spreads on days when the S&P 500 closed higher. The results mirrored those of the put spread analysis:

• Consistent Losses: Across all delta strikes (15, 20, 25, 40, 50), selling call spreads on up days resulted in consistent losses.
• Upward Momentum: The speakers noted that rallies often build momentum throughout the day, exceeding the strike prices of sold call options, leading to significant losses. This aligns with previous studies showing that upward trends tend to continue and “blow through” call options.

IV. Iron Condor Analysis

The study also briefly touched upon the performance of iron condors (selling both put and call spreads). The results were also unfavorable, particularly when using a 35% profit target.

V. Key Arguments & Perspectives

The central argument presented is that the distance out-of-the-money (represented by delta) significantly impacts profitability when trading zero DTE options, especially on adverse days.

• Lower Delta is Preferable: The data suggests that selling options further out-of-the-money (lower delta) provides a greater cushion against adverse price movements. However, this comes at the cost of reduced premium income.
• Profit Target Importance: The choice of profit target is crucial. A low profit target (15%) requires a high win rate, making it difficult to overcome losses. Higher profit targets (25%, 35%) exacerbate losses on adverse days.
• Directional Bias: The study highlighted the difficulty of profiting from selling calls during sustained upward trends in the S&P 500. The speakers expressed a preference for focusing on put selling strategies.

VI. Notable Quotes

• “If you're taking 15%, so you're taking less than $100 out of it. You have one loss, one full loss where you lose $1,500. You need 15 winners to make up for one loss.” – Emphasizing the importance of win rate with low profit targets.
• “With the overall upward tear of S&P, there has been no way to profit from only selling calls, but using 30 delta or 20 delta, we're able to cushion the pain.” – Highlighting the challenges of selling calls in a bull market.

VII. Data & Statistics

• Data Period: Nearly three years of S&P 500 zero DTE options data.
• Data Frequency: Data collected every 10 minutes.
• Spread Width: $20-wide vertical spreads.
• Profit Targets: 15%, 25%, and 35% of maximum profit.
• Exercise Price: Mid-price.
• Mean Daily P&L: Used to assess performance across different delta strikes and profit targets.

VIII. Synthesis & Conclusion

The study underscores the inherent risks of zero DTE options trading, particularly when the market moves against the trader. While selling options further out-of-the-money (lower delta) can mitigate losses, it also reduces potential profit. The choice of profit target is critical, as low targets require an unsustainable win rate. The analysis suggests that, given the historical upward trend of the S&P 500, focusing on put selling strategies with a 20-delta strike and a more realistic profit target (higher than 15%) may be a more prudent approach. However, the speakers cautioned that the results are specific to down/up days and may not be representative of overall market conditions. The key takeaway is the need for careful risk management and a thorough understanding of the trade-offs involved in zero DTE options trading.