What is Expiry Day Trading ? (0DTE)

What is Expiry Day Trading

EP 1 

Expiry day trading is the new phenomenon that has taken over the markets all over the world post pandemic. Expiry day trading has grown to a huge extent, so much so that almost 50% of the volume traded in the SPX (S&P 500) comes from 0DTE (Zero Day to Expiration) Options trading.   

It essentially means that the option contract you are trading will expire at the end of the day. This comes with its own set of pros and cons. In the first episode, we will dive into the basics of expiry day trading and how it became famous among option traders.

What is Expiry Day Trading:               ­

Irrespective of daily, weekly or monthly contracts every option contract has an expiry day. The trades which are made on the day of expiry are called expiry day trading. This is particularly famous among option writers due to the increased theta decay on the day of expiration.

The volumes traded and the volatility will higher significantly higher on the expiry day.

Every day is an expiry day:

Before the introduction of weekly contracts in the Indian derivatives market, only 5-to-6-day expiry days were available in a month. But after the introduction of the weekly contracts every trading day has become an expiry day.

As shown above, every trading day of the week has a contract that is about to expire. As more people started shifting to weekly contracts its liquidity increased which in-turn made people to trade in weekly expiries.

Expiry day & Option sellers:

All other factors remaining the same, the expiry day is generally in the favour of option sellers due to the increased rate of theta decay. Theta decay is the process of steady decrease in the time value of the option. The decay happens in a slow and steady manner in the first half of the option’s time period, in the second half the rate of theta decay increases rapidly.

To capture this rapid decay of theta, option sellers prefer trading on expiry days. Generally, in a range bound market, sellers would opt for delta neutral strategies like short straddle, short strangle etc. to capture the premium decay.

Expiry day & option buying:

Option buyers are on race against time during the expiry day trades. Theta is a friend to option sellers and an enemy to option buyers. The predicted move of the option sellers should happen before the expiration of the contract or else the contract would expire worthless and the buyer would lose all the premium he paid.

The Bottom-line:

In conclusion, expiry day trading is a strategy in the derivatives market where traders try to capitalize on price movements before the expiration of the contracts. While it might seem lucrative, one should study the risks involved and check whether it suits his/her risk appetite, considering the potential drawdown that can occur. Understanding the market sentiment, opting for apt risk management, and developing ideal trading mindset are vital for a profitable expiry day trading strategy.