Zero DTE Strategy: When Second Trades Work Best

Key Concepts

• Zero Day To Expiration (0DTE) options
• Put spreads
• Double dipping (taking multiple trades in a day)
• Capital redeployment
• Delta (a measure of an option's sensitivity to changes in the underlying asset's price)
• At-the-money (ATM)
• Out-of-the-money (OTM)
• Max profit
• Win rate
• Sample size
• Commissions

Study Methodology and Findings

This video discusses a study analyzing the effectiveness of "double dipping" in 0DTE SPX put spread trades. The core idea is to close an initial trade for a small profit and then immediately open a second trade with the redeployed capital.

Study Design:

• Data Source: Two and a half years of 0DTE SPX options data.
• Trade Initiation: Trades began at 9:00 a.m.
• Trade Structure: $10 wide put spreads.
• Initial Trade Exit Criteria: Closed when 10% or 20% of max profit was reached.
• Second Trade Analysis: The study focused exclusively on the performance of the second trades initiated after the first was closed.
• Variations Tested:
  • $10 wide put spreads with short strikes at the money (50 delta).
  • $20 wide put spreads with short strikes at 25 delta.
• Profit Targets for Second Trades: Analyzed for both 10% and 20% of max profit.
• Time Segmentation: Performance was broken down by the time of day the second trade was initiated (before 10 a.m., 10-11 a.m., 11 a.m.-noon, afternoon).

Key Findings:

1. High Win Rates Across the Board: All tested strategies demonstrated high win rates for the second trades.
2. Early Trades are More Successful:
   • Sample Size: The largest sample sizes for profitable second trades were consistently observed for trades initiated before 10:00 a.m. This indicates that more opportunities to close a profitable second trade exist earlier in the day.
   • Profitability: While win rates remained high later in the day, the sample sizes diminished significantly, suggesting that if a second trade doesn't become profitable early, it's less likely to do so later.
   • Recommendation: The presenters suggest that if a second trade isn't profitable by 10 a.m. or 11 a.m., it might be best to close it, drawing a parallel to the advice of closing initial trades by noon.
3. Impact of Profit Target:
   • 10% Profit Target: Generally led to more occurrences and higher success rates for the second trades, especially when initiated earlier.
   • 20% Profit Target: While still profitable, the sample sizes were smaller, and there was one instance of a negative outcome between 11 a.m. and noon with a small sample size (34 occurrences). This suggests that aiming for a higher profit target on the second trade might require a more conservative approach or earlier execution.
4. Trade Width and Delta:
   • $10 Wide, At-the-Money (50 Delta): Showed very high win rates, with the majority of successful second trades occurring before 10 a.m.
   • $20 Wide, 25 Delta: Also demonstrated high win rates, with a similar pattern of more occurrences and success before 10 a.m. The win rates for these were slightly higher (97-98%) compared to the 50 delta trades.
5. "Quick Pop" Strategy: The success of these trades relies on a "quick pop" in the underlying, not necessarily a directional move of the SPX for the entire day. The study suggests that there might be more upward moves before 10 a.m., contributing to the early success.
6. Commissions: Put spreads are considered cost-effective due to their two-leg structure, unlike four-leg strategies like iron condors.

Personal Takeaways and Perspectives

The presenters shared their individual interpretations of the study's results:

• Redeploying Capital: The ability to redeploy capital from a quickly closed initial trade into a second trade is a key advantage of 0DTEs, allowing for potentially multiple small wins within a single day.
• Flexibility for Missed Entries: If an initial trade is missed at the optimal 9:00 a.m. entry, there's still a good chance of success with a second trade initiated later in the morning.
• Preference for Single, Larger Wins: One presenter expressed a personal preference for executing a single trade with a larger profit target (e.g., 35-50%) rather than "double dipping" for smaller gains on two separate trades.
• "Layering" Strategy: Some traders, like "Blue Wackadoo" and "Jack Tucker," employ a "layering" strategy, adding to a position as the market moves, which is distinct from taking profits and re-entering.

Notable Quotes

• "Key advantages of managing winners early with longer day trades is the ability to redeploy capital."
• "If you're taking a smaller percentage, can you get back in? Deploy the capital doesn't make sense. That's that's the question we're going to answer today."
• "10% is so easy to get in an SPX trade."
• "If yours doesn't come off for a win by 10, most of the time it's not your first trade. If your first trade doesn't come off for a win by 10, most of the time it's not coming off for a win after that."
• "Being directionally correct is an advantage, and there have been been very few ways to sell S&P puts recently, but that shouldn't stop us from looking at the best."
• "When winning credit put spreads came off before 11, starting another trade was an effective way to increase daily profits."
• "Every day is a new set of opportunities for zero DT traders. And when those opportunities pay off, especially quickly, you might even get more than one winner in a morning."

Conclusion

The study suggests that "double dipping" in 0DTE SPX put spread trading, by taking a small profit on an initial trade and immediately entering a second one, can be an effective strategy to increase daily profits. The success of this approach is heavily influenced by the timing of the trades, with earlier entries (before 10 a.m.) showing the most robust results in terms of sample size and consistent profitability. While the win rates remain high throughout the day, the diminishing sample sizes later on indicate a reduced likelihood of securing a profitable second trade. Traders can choose to aim for smaller, more frequent wins or opt for a single trade with a larger profit target, depending on their individual strategy and risk tolerance. The cost-effectiveness of put spreads due to their two-leg structure is also a notable advantage.