- Zero DTE refers to trading (or analyzing) options on their last day of expiration (opex). DTE means days to expiration, and so “zero DTE options” are simply options on their last day before either expiring worthless or with some value.
- Zero DTE options have extremely high gamma levels (how quickly the size of an option changes based upon success with direction) and extremely high theta levels (the accelerating pace of the time decay of an option’s price).
- As long as most institutional players are short zero DTE options, then this has a stabilizing effect for the market during the day; overnight gaps lack this liquidity protection.
- DTE is a core point of mechanics for any options strategy, as dynamics change substantially based on differences in DTE.
- An option’s value decays faster when DTE is lower.
- An option’s value is less sensitive to changes in implied volatility when DTE is lower.
- Short options are riskier when DTE is lower.
Advanced Discussion
When we look at term structure edge with different DTEs, we want an advantage by writing on a date with a higher IV% and buying on a date with a lower IV%. But sometimes there are seasonal reasons why IV should be higher or lower in different months, which complicates this analysis.
Another term commonly used as a unit of DTE is tenor. When we say “first tenor” we mean the first (shortest-duration) month, the second tenor is the second month out, the third tenor is the third month out, and so on. This means that the first tenor is the front month and the second tenor is the back month.