The 0DTE, a.k.a. Zero Days to Expiration, options trading strategy gets its edge from the exponentially increasing decay of premium as expiration nears. There’s no other day where it decays faster than on that very last day of options expiration. The most popular asset to trade on 0DTE is options on the S&P 500 Index (SPX) because of the number of opportunities a trader has each week. There are three expiring contracts for options on the index every week; Monday, Wednesday and Friday. But the SPX isn’t the only asset class that has 3 opportunities per week, there are at least 3 others; the SPY ETF, the S&P E-mini Futures (/ES), and the Nasdaq Index (NQX).
Many people tout the 0DTE strategy as a great way to produce consistent income using high probability strategies like ultra low delta Credit Spreads and super-wide Iron Condors. This appears to be a honeypot to many naive retail traders, and so they dive. waist deep into services that promote 0DTE with the SPX.
So, why are options on the SPX most popular? Is it better than the others, easier to trade, easier to profit, lower cost, fewer restrictions? The answers will surprise you. First a spoiler alert, the SPX is definitely not the best way to trade options on the 0DTE.
Before we talk about why the SPX is not the best way to trade a 0DTE strategy, let’s take an objective look at the differences between these 4 asset types; the SPX, the SPY, the S&P E-mini and the NDX. You should first know that all 4 assets have 3 expiring contracts per week. If there’s a holiday on Monday or Friday, then Monday expirations are moved to Tuesday, and Friday expirations are moved to Thursday. The next thing you need to know is that index options are European style, while the SPY and futures are American style options contracts. For an explanation of the difference between American and European options go here.
So, the first way we’ll tackle the which is better question ir to compare European and American options.
EXPIRATION EUROPEAN: Gives the option holder the right to exercise the option holder the right to exercise the option only at the pre-agreed future date and price. Beware of Monthly AM vs Weekly PM expirations, only choose weeklies that have PM expirations, otherwise you risk significant capital loss from overnight changes in the index price.
EXPIRATION AMERICAN: Gives the option holder the right to exercise the option at any date and time before the expiration date at the pre-agreed price. Always PM expirations.
SETTLEMENT EUROPEAN: Always settled in cash, there’s no underlying because the index is just a calculated value.
SETTLEMENT AMERICAN: Settled in cash if you sell your option prior to expiration. However, if your option is assigned prior to expiation, then you will be responsible for the margin requirement of the received asset. If your option is ITM at expiration there will be automatic assignment, otherwise nothing will happen, as it will be worthless.
PREMIUM:The liberty to exercise American options at any time makes them more in demand, and therefore they typically have more premium associated with them. This is a good thing for 0DTE as the greater the premium, the greater the potential profit, and lower risk.
LIQUIDITY: European options on the SPX generally have greater volume and open interest than the E-mini Futures, however both are highly liquid, and regardless of your order size it is likely to be filled with a minimal spread with either the the SPX or E-mini. Same goes for the SPY ETF. The NDX is a different story, it is far less liquid with much larger spreads, and is much more expensive to boot.
ANALYSIS: The E-mini futures are far easier to analyze because they are available to trade 23 hours a say, as opposed to the SPX which is only traded during normal market hours. In addition to the restricted hours, there’s no volume associated with the index, because nobody trades the index directly, so volumetric analysis is impossible. However with the E-mini there is volume and so that along with being open 23 hours a day, make analysis much easier and more accurate compared to the SPX.
TRADING: As with analysis, trading is much easier with the E-mini than with the SPX or SPY (NDX really isn’t worth it). You can trade the E-mini all hours of the day and night, except for a small window in the early evening between 5 and 6PM EDT. This provides far more opportunity to profit and to take advantage of external events that can affect price. With the SPX you are often left with a surprise if you attempt to enter a trade and hold it overnight. Also, you can’t take advantage of early morning economic reports prior to the market opening, as you can with the E-mini.
PATTERN DAY TRADER RULE: If your account is not at least $25,000 then you are at risk of violating the PDT Rule with the SPX and the SPY if you open and close an SPX or SPY options trade more than 4 times within a 5 day rolling window. You risk having your account halted for 90 days upon your fist violation. There is no such restriction with E-mini futures, you can open and close trades as often as you like, with no restriction on account size.
COMMISSIONS: The cost of trading SPX and SPY options is generally less, with most brokers offering prices as low as 65 cents per contract plus exchange fees. With the E-mini, most brokers start new traders off at $2.25 per contract, but after a short while you can usually negotiate that price below $1 per contract, plus exchange fees.So, this is a clear advantage for the SPX and SPY.
CONCLUSION: So, if cost is your only consideration and you have a small account, then you. might choose the SPX or SPY. However, for every other reason, plus tax reasons which I did not mention (perhaps in another article), the E-mini futures is FAR superior to the SPX when trading the 0DTE strategy. There are no restrictions with regard to the PDT rule, time to trade and analysis, you can execute based on better information and collect far more premium, have higher profit potential, with lower risk, and lower time in the trade.