Dangers of Same-Day Expirations

It may sometimes sound like I denounce any strategy that is not fitting to what we do. Actually, I don’t. But I have tried so many different systems to make money on the market, that now I focus only on what works best for me with the least amount of risk.

One such strategy that pops up frequently is trading same-day expiration options, or 0DTE. I know some traders do very well with this approach… kudos to them!

In fact, we have some such traders amongst us in our trading room. I address this topic because we recently heard of one member who suffered a serious setback from this high-risk strategy. He used to chime in with his victories, then he went silent. Turned out, he was in heavy and lost when SPY suddenly changed course without warning. It’s a stark reminder as to who is the boss in this business, and unless you are a market maker, it isn’t you. Nothing is more humbling than the stock market.

For me, this is just too risky. It is true: you can make bucketfuls of money in a very short period of time. For example, in a recent Trading Room session, I talked about a chart setup on SPDR S&P 500 ETF Trust, SPY, that, should it drop under a key support area, the stock could drop significantly, and I would consider buying puts. I also know that if the stock would fall, it would likely be fast and furious, an ideal situation for same-day expiration options. Unfortunately, I did not take the trade simply because I had a very busy schedule and could not watch the markets for most of the rest of the day. I was fine with that as the markets provide plenty of opportunities all day, regardless.

My situation that morning did not preclude me from checking up on those potential puts when I returned to my computer. When I talked about them at around 10:30 a.m. ET, the “at the money” same-day expiration (0DTE) 565 strike price puts were trading for .85. SPY did break that support I mentioned, and those puts quickly jumped to 1.17 by 10:36 a.m., a potential 37+% within a very few short minutes.

The converse of this is that when the stock reverses on you, the premium is sucked out very quickly. Those same puts hit a low of .57 by 10:47, or a would-be loss of 33%. How many of those trades can you emotionally tolerate? Can you be right 100% of the time? Because if you cannot, it is just a matter of time before you suffer a major loss. Time is not on your side with same day expiring options, which means you must be right in your assessment. And the move must happen fast. By the way, if the stock reverses back in your favor, it seems to be rather slow in returning the lost premium.

It is very easy to be lured into this exciting and lucrative strategy. I have made a lot of money trading 0DTE. And I have also lost a lot of money trading 0DTE. For long-term success, I prefer a higher level of safety, if such a thing exists with options trading.

If you insist on 0DTE, then I highly recommend a) only doing so after at least six months of solid experience in this field and fully understanding the risks, and b) using a stop loss — preferably a trailing stop —  to limit your exposure. Also, trade small numbers of contracts and resist the urge to go all in.

This is just one of the many things we talk about in our morning Trading Room. The benefits are many and even if you are a seasoned trader, you stand to benefit greatly in being here with Ahren and me. Consider that your precious mentorship time, mornings, 9:20 to 10:30 a.m. ET. Every serious career requires its professionals to attend some form of continuing education to ensure they remain relevant. Pilots must undergo regular checks and assessments to stay current and safe. As a trader, you should also aspire to keep your trading senses sharp, especially in the ever-changing options trading arena. Click here for details and to subscribe to our Trading Room.

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