Thanks for the research. Theta decay is one side of the coin, the other side is as expiration approaches, Gemma risk increases exponentially, which is why I limit my 0DTE in the morning - not because I have any illusion that time decay is linear, but to avoid large swing late in the day and the outlier risk.
Great video, i literally started papertrading 0DTE options this week and your spot on about the time decay. Its not rapid and I had to wait until the last hour or less to really see a drop in price.
This is one of the best videos I have seen on how theta decay works at expiration! Thank you for sharing that valuable information! I've never traded 0DTE, but my question would be the market maker's willingness to accept good limit prices.
Glad it was helpful and thanks for the kind words Patrick. I think it depends on the strikes and pricing but there's definitely room to trade these contracts right up until the close.
Interesting study. I did something similar in ‘23 with wide spreads to simulate naked options since the margin requirements is crazy for SPX. Little difference in the theta decay with a significant drop early, then flat mid day and another drop at the end. I looked back at that data with tighter spreads and it seems to line up with what you found here.
Good to know thanks for sharing. I do think that an overnight type premium decay study would be good to see. We'll add that to the list along with wider spreads as well for future research. Thanks!
Trading spreads is trading the difference between 2 contracts. Both contracts are decreasing in value as expected, but they are losing value at similar rates. The closer together, the less the difference in a contract’s “character” (ie delta, theta) and therefore less difference in price through time/price movement. Wider spreads will result in something more representative of selling naked.
Correct the spread would be the difference between the contracts. If we looked at single options it might be a different (or similar) decay curve, but our assumption was that naked SPX options are not realistic for 95% of traders. So, we used spreads to make it more relatable to what people would actually trade.
@@OptionAlpha Understood! It would be interesting to find the spread width that would be the most efficient. $20 wide might decay "better", but is it worth the extra risk?
@@hockeymarine88 I use $25 wings because i might take more risk in cash but I take less risk in time. It has paid out better for me to shorten my hold to profit time of 25% of credit that the actual value if risk. I exchange my risk $ for time. The shorter i have to hold the less time there is for the 0DTE to go sideways on me.
In order to get a better handle on your risk in a zero DTE situation, shouldn’t you also consider gamma which increases exponentially towards the end of day
Been looking for info like this ever since I started trading 0DTE regularly. Thanks! 😸
Thanks for the research. Theta decay is one side of the coin, the other side is as expiration approaches, Gemma risk increases exponentially, which is why I limit my 0DTE in the morning - not because I have any illusion that time decay is linear, but to avoid large swing late in the day and the outlier risk.
That said, curious to see the forward testing results of the late day 0DTE bot.
Indeed there is a trade-off for sure.
Exactly.
Great video, i literally started papertrading 0DTE options this week and your spot on about the time decay. Its not rapid and I had to wait until the last hour or less to really see a drop in price.
This is one of the best videos I have seen on how theta decay works at expiration! Thank you for sharing that valuable information! I've never traded 0DTE, but my question would be the market maker's willingness to accept good limit prices.
Glad it was helpful and thanks for the kind words Patrick. I think it depends on the strikes and pricing but there's definitely room to trade these contracts right up until the close.
Interesting study. I did something similar in ‘23 with wide spreads to simulate naked options since the margin requirements is crazy for SPX. Little difference in the theta decay with a significant drop early, then flat mid day and another drop at the end. I looked back at that data with tighter spreads and it seems to line up with what you found here.
Good to know thanks for sharing. I do think that an overnight type premium decay study would be good to see. We'll add that to the list along with wider spreads as well for future research. Thanks!
@@OptionAlphaEuan Sinclair has done a lot of research on this , check out his last book and videos.
appreciate the information on 0dte theta decay
Very welcome thanks for letting us know you found it helpful!
Fantastic analysis!
Glad you enjoyed it thanks for the comment!
Thanks! I really learned something from this vid!
My problem with Robin Hood is that they will automatically close my spreads at 3:30. Unless the spreads are deep in or out of the money.
Trading spreads is trading the difference between 2 contracts. Both contracts are decreasing in value as expected, but they are losing value at similar rates. The closer together, the less the difference in a contract’s “character” (ie delta, theta) and therefore less difference in price through time/price movement. Wider spreads will result in something more representative of selling naked.
Correct the spread would be the difference between the contracts. If we looked at single options it might be a different (or similar) decay curve, but our assumption was that naked SPX options are not realistic for 95% of traders. So, we used spreads to make it more relatable to what people would actually trade.
@@OptionAlpha Understood! It would be interesting to find the spread width that would be the most efficient. $20 wide might decay "better", but is it worth the extra risk?
Indeed! Stay tuned! We've got something cooking that will help with that :)
@@hockeymarine88 I use $25 wings because i might take more risk in cash but I take less risk in time. It has paid out better for me to shorten my hold to profit time of 25% of credit that the actual value if risk. I exchange my risk $ for time. The shorter i have to hold the less time there is for the 0DTE to go sideways on me.
Great research!
In order to get a better handle on your risk in a zero DTE situation, shouldn’t you also consider gamma which increases exponentially towards the end of day
thx!
Very welcome!
5 dollar wide at 10 otm wouldn't decay until the end i would be interested in seeing wider spreads and how that works
We'll do more tests soon and post those.
could you clarify what does 10 points itm mean exactly pls, is it the 10% itm w.r.t the spot price?
10 points means $10 from the market price.
Thanks for the research.