0 DTE And 1 DTE Trading: The Ultimate Guide

0 DTE and 1 DTE Trading: The Ultimate Guide

I believe that selling strangles on SPX using 1 DTE trading is better than any other 0 or 1 DTE option trading strategy.

Understanding 0 and 1 DTE Trading

Day to Expiration (DTE) refers to the number of days left until an option contract expires. In the context of 0 and 1 DTE trading, we’re talking about options that expire either the same day (0 DTE) or the next day (1 DTE).

Why is selling 1 DTE SPX strangles the best 0 DTE or 1 DTE strategy?

1. Selling Strangles

It’s better to sell strangles than to buy options when trading this strategy.

A strangle is an options strategy where the investor holds a position in both a call and put with different strike prices, but with the same expiration date and underlying asset.

This strategy allows the investor to make a profit whether the market goes up or down.

2. Tax Benefits

When selling 1 DTE option strangles on SPX, traders are trading cash-settled 1256 contracts.

Section 1256 contracts have a beneficial tax treatment under the U.S. Internal Revenue Code.

They are marked to market at the end of each tax year, and the gains and losses are considered to be 60% long-term and 40% short-term, regardless of the actual holding period.

3. Volatility Contraction

There’s often a large volatility contraction at the open the next day when selling 1 DTE. 

This means that the price of the option decreases, which is beneficial for an options seller.

Trading with SPY or XSP

For traders who do not have a large account, trading with SPY (S&P 500 ETF) or XSP (Mini-SPX Index Options) is a viable option.

These instruments provide a lower cost of entry and are ideal for beginners or those with smaller accounts.

In conclusion, 1 DTE trading, particularly selling strangles, can be a profitable strategy with tax benefits and opportunities for volatility contraction.

As with any trading strategy, it’s important to learn the nuances of risk management, stop losses, trading size, etc.

We discuss this in our options trading course at https://beststockstrategy.com/memberships

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The Impact of Volatility on Premiums in 1 DTE Strangle Selling

In 2023, a decent amount of profits were realized with 1 DTE (please refer to the video above).

One of the major benefits of selling strangles with 1 Day to Expiration (DTE) is the relationship between the Volatility Index (VIX) and the premium collected.

The VIX, often referred to as the “fear gauge,” is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days.

When the VIX increases, it indicates that traders anticipate a larger movement in the market, which translates to higher volatility.

When selling options, traders collect option premium, which is essentially the price of the option.

This premium is influenced by several factors, one of which is volatility.

As volatility increases, so does the premium of the option. This is because the potential for large price swings makes the option more valuable, as it increases the likelihood of the option ending up in the money.

Therefore, when the VIX is high, you’re able to collect substantially more premium when selling strangles with 1 DTE than when the VIX is low.

This increased premium can potentially lead to higher profits, assuming the underlying asset’s price does not move beyond the strike prices of the sold options.

However, it’s important to note that while high VIX values can lead to larger premiums, they also indicate a market expectation of larger price swings. This could increase the risk of the options being exercised, potentially leading to losses. As always, understanding the risks and potential rewards is crucial when engaging in any trading strategy.

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Conclusion: 0 DTE and 1 DTE Option Trading

In this discussion, we delved into the world of 0 and 1 Day to Expiration (DTE) trading, guided by the insights of David Jaffee from BestStockStrategy.com.

We learned that DTE refers to the number of days left until an option contract expires. Jaffee prefers 1 DTE trading over 0 DTE option trading for several reasons. He advocates for selling strangles, a strategy that allows traders to profit regardless of market direction.

When selling 1 DTE option strangles on SPX, traders are dealing with cash-settled 1256 contracts, which come with tax benefits.

Additionally, 1 DTE trading allows for a large volatility contraction at the open the next day, which is beneficial for options sellers.

We also discussed how the Volatility Index (VIX) impacts the premium collected in 1 DTE trading. As the VIX increases, indicating higher market volatility, traders can collect substantially more premium when selling strangles.

For traders with smaller accounts, trading with SPY (S&P 500 ETF) or XSP (Mini-SPX Index Options) was suggested as a viable option due to their lower cost of entry.

In conclusion, 1 DTE trading, particularly selling strangles, can be a profitable strategy with tax benefits and opportunities for volatility contraction. However, like any trading strategy, it’s important to understand the risks involved and to trade only with capital you can afford to lose.

Education and understanding of the markets and trading strategies is the best form of risk management. Happy trading!

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Frequently Asked Questions (FAQs)

What does DTE mean in trading?

DTE refers to "days to expiration"

Which is better 1 DTE or 0 DTE?

I prefer 1 DTE since you're able to capture significantly more premium.

When trading 0 DTE or 1 DTE, should I buy options or sell options?

I prefer to sell 1 DTE strangles on SPX (or SPY)

How Can I Learn More About 0 DTE and 1 DTE Options Trading?

Visit beststockstrategy.com/memberships

Should I Trade Options During a Bear Market?

Yes, if done correctly, then trading options will enhance your returns and allow you to beat the market.

Trading 1 DTE options during a bear market will allow you to collect substantial premium since volatility will be elevated.

Can you make money with 0DTE options?

Yes, you can make money but you need strict risk management rules in place to eliminate tail risk.

1DTE vs 0DTE?

I prefer 1 DTE over 0DTE because there's substantially more premium available when selling 1DTE.

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

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