0DTE Options: The Most Powerful Tool in Finance

TLDR

• Zero days to expiration (0DTE) options have taken markets by storm
• 0DTE crypto options offer a uniquely attractive value proposition
  • Low-cost and minimal max loss
  • Higher volatility than TradFi 0DTE options on high beta tech stocks
  • No liquidation risk despite having higher leverage than perps
  • Transparency, self-custody, and 24/7 market access
• 0DTE options have the highest profit potential to cost ratio of any financial instrument

Examining the WSJ 0DTE Options Piece

“Traders are piling into 0DTE options—a cheap, fast, but risky way to bet on the market that offers the chance of explosive returns if those bets are correct. We’ll explain their rise and their effect on the stock market.” - WSJ

In a recent Wall Street Journal video, reputed WSJ Markets reporter Gunjan Banerji stated that the stock market’s shift to 0DTE options is one of the biggest pivots she has seen in markets in the past decade. As the video highlighted, 0DTE options have exploded in popularity in the past year. They’re the cheapest form of leverage in the financial universe, and their popularity is increasing at a rapid rate.

Grayson, the trader referenced in the video, has been trading options for about a year and found his niche with 0DTE options after being attracted to their massive upside potential. Despite being relegated to a rigid trading schedule dictated by TradFi options market hours, he has managed to do extremely well for himself, systematizing his processes and refining the craft of trading 0DTE options into a successful career. He was initially magnetized by the infinite profit potential of 0DTE options

Grayson kicks off his pre-sunrise trading session by checking the news. Why? Well, 0DTE options are extremely sensitive to the most subtle price fluctuations, so staying abreast of the latest news can be the difference between losing a few thousand dollars or winning tens of thousands of dollars. With approximately 5x more tradable hours in crypto due to 24/7 markets, you get approximately 5x more event-based trading opportunities. They say the market never sleeps, but in reality, TradFi markets are asleep more than they’re awake, in addition to being less volatile than crypto markets. 0DTE crypto options are like TradFi 0DTE options on nitrous.

💡 Crypto options markets are open for 168hrs/week, whereas TradFi options markets are open for 32.5hrs/week. When peeling back the onion, what we see is that crypto options markets are more accessible, more volatile, more transparent, and subject to far less credit risk due to their self-custodial nature.

• TradFi Market Hours
  • Daily Operating Hours: 9:30 AM to 4:00 PM = 6.5 hours per day
  • Weekly Operating Days: Monday through Friday (5 days)
  • Weekly Total Hours: ****6.5 hours/day ×5 days/week = 32.5 hours/week
• Crypto Market Hours
  • Daily Operating Hours: 24 hours
  • Weekly Operating Days: 7 days a week
  • Weekly Total Hours: 24 hours/day ×7 days/week = 168 hours

Gunjan notes that the financial freedom 0DTE options gave Grayson allowed him to significantly upgrade his automobile and enjoy more family time. It’s fair to assume that once he discovers the unmatched flexibility of 0DTE crypto options, he’ll be able to do everything he’s done in TradFi options markets, but with greater flexibility, with the end result hopefully being financial freedom. When it comes to maximizing value for options traders, Lyra tries harder.

The Proliferation of 0TDE Options

“Retail participation in options market trading rose sharply during the pandemic, peaking at 48% in July 2022. While it has bounced around since then, it hit 45% in July 2023. This data suggests that substantial retail options trading is here for the foreseeable future.” - NYSE

When exchange-traded equity options launched on the Chicago Board Options Exchange (CBOE) in 1973, the only expiry offerings were quarterlies — options expiring on a quarterly basis. After quarterlies, longer-dated options (LEAPS) entered the fold. Longer-dated options, such as monthlies, quarterlies, and LEAPS offer traders the ability to trade macroeconomic events, earnings, fundamentals and more, all without the risk of liquidation. Selling options spreads is a popular strategy traders use to generate passive income and monthlies, for example, are often utilized to that end. Given the clear benefit and myriad use cases of longer-dated options, why have ODTE options been ripping? Will retail traders ever be satiated? Probably not, and for good reason.

Short-dated options volumes have increased precipitously in recent years, now accounting for the vast majority of options market volumes. Based on recent CBOE data, options with less than five days to expiration currently account for approximately half of all stock market options volumes. There are a number of causative factors behind this trend. One natural cause is, of course, related to high amounts of trading activity for longer-dated options on their final day of trading, however, a myriad of other more intrinsic factors have catalyzed their market takeover.

0DTE Options: Under the Hood

0DTE options offer traders cheap access to leverage and are extremely sensitive to subtle moves in their underlying assets. In options terms, the two fundamental properties that make 0DTEs so attractive to both options buyers and sellers are their low time value and high price sensitivity (i.e. theta and gamma).

The cost of an option, referred to as its premium, is comprised of intrinsic and extrinsic value. Intrinsic value is simply the difference between the price of the option’s underlying and its strike price, whereas extrinsic value is comprised of an option’s time value and its implied volatility. Generally speaking, 0DTE options premiums tend to either decay quickly, resulting in a profit for the seller, or they explode to the upside, resulting in outsized premiums for the buyer.

• Options buyers are attracted to 0DTE and other short-dated options because they offer traders greater leverage than highly levered perp positions at a fraction of the cost, without liquidation risk. The premiums at which 0DTE options trade are reflective of their short distance to expiry. In the case of event-based trading, where traders foresee substantial price action on a short time horizon, 0DTEs offer traders cheap and highly leveraged exposure. This makes 0DTE options the optimal instrument for trading both macroeconomic and asset-specific events such as partnerships and product launches.
• On the other side of the trade, options sellers can collect premiums by consistently selling options and option spreads on 0DTE options, taking advantage of their high rate of time decay. By selling spreads on 0DTEs, traders can strictly define their max loss thresholds and use the premiums harvested to fund other strategies. Minimal waiting time is required to realize profits, making selling spreads an attractive strategy to repeat on a recurring basis. Passive income generation (e.g. selling options spreads, particularly in high volatility environments can be extremely lucrative).

Another attractive aspect of 0DTE options is their suitability for hedging spot positions in advance of volatility-inducing market events. Not protecting your crypto portfolio with options is like not having flood insurance whilst living in a flood-zone. Options with low-cost premiums give you cheap portfolio insurance to protect your downside if the market blows up.

• Strategies like Hedge Wrappers can yield outsized payouts and are a popular 0DTE option trading strategy, executed by selling a call and using the premium collected to buy a protective put. An example of this strategy on Lyra would, using ETH would entail depositing 1 ETH, selling 1 ETH call, and buying 1 ETH put.
• Using perps to hedge has its benefits, but the risk of liquidation exposes traders to potentially losing their hedge mid-trade, and the variable funding rates associated with perps add an additional element of uncertainty. Conversely, utilizing short-dated options to hedge event-based market and asset risks gives traders downside protection with a minimized capital outlay and zero liquidation risk.

What Makes 0DTE Options So Explosive?

Gamma

Gamma is what gives options their acceleration effect, and options approaching expiry, particularly those with 0-1 DTE, have the highest gamma sensitivity. This is because the deltas of soon-to-expire options are rapidly converging on either zero or one; zero if expiring out of the money and one if expiring in the money. While delta measures the sensitivity of an option to underlying asset price fluctuations, gamma measures the rate of change of an option’s delta. Acceleration is to speed as gamma is to delta, hence why the same person that likes going from 0-60mph in a fast car might also enjoy holding a 0DTE option as it increases in price by orders of magnitude in a matter of minutes — or even seconds.

Convexity

Just as a lever amplifies force, allowing a small push to lift heavy weights, convexity magnifies the impact of directionally favorable price swings, increasing the upside with each subsequent positive movement. Similarly, when directionally unfavorable price action occurs, the magnitude of your losses is lessened with each subsequent unfavorable move.

When an option ventures into the money (ITM), moving with a momentum that outstrips theta decay, its premium appreciates in a nonlinear manner. This phenomenon is akin to a snowball rolling downhill, gaining size and speed; the initial push — the option moving ITM or closer to ITM — results in dramatic price increase as the associated option’s extrinsic value expands. This principle is foundational to options trading and explains why so many options traders enjoy being long gamma, or in other words, positioning themself to profit dramatically in the event that volatility exceeds expectations. The maximum loss associated with long option is your upfront premium paid, while much like the potential energy of a well-placed lever, the upside potential of long options knows few bounds.

How to Trade 0DTE Options on Lyra

Example: Long APR 3 ETH $3325 Call

1. Select the nearest possible expiration date from the expiries row atop the UI.

2. Locate the current price of ETH in the center of the options board.

1. On the Calls side of the UI, select a call option with a strike price you think ETH will breach in advance of the selected expiry.

1. Adjust your Size and Limit Price ($25.23) **in the trade form, then review and submit your order.

Close your position whenever you feel most comfortable with your level of risk-tolerance.

Conclusion: The Convex World Order

The rapid growth of 0DTE options has catalyzed a step change in TradFi market dynamics and the fervor is now making its way to the most volatile, accessible, and transparent market on earth — the crypto options market. Crypto 0DTE options offer an enticingly cheaply and thrillingly volatile experience that exceeds even the most turbulent assets in traditional finance, such as high beta tech stocks and hard commodities.

In addition to being cheap and offering high leverage, 0DTE options, like all options, allow you to achieve levered exposures without liquidation risk or needing to worry about funding rate variance — two problems associated with relying on perps to trade short time horizons. And unlike in TradFi, Lyra offers 0DTE options on a transparent, self-custodial platform that is open 24/7. Zero days to expiration (0DTE) options have taken markets by storm by offering an unmatched value proposition. They’re low-cost and have strictly defined max loss thresholds, higher leverage than perps, and confer the highest profit potential to cost ratio of any financial instrument.

The storm provides ⚡ ⛈️ 🌪️