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Zero Days to Expiration (0DTE) Options Glossary

Posted on by ernie
02
Jan

0DTE Options Glossary

This is a complete options glossary that includes terms and definitions that are specific to day trading 0DTE options using the 0-DTE strategy, methods, and processes.

American- Style Option

An option contract that may be exercised at any time between the date of purchase and the expiration date.

Ask Price

The price at which a seller offers to sell an option or a stock. See also Assignment.

Assigned

The price at which a seller offers to sell an option or a stock. See also Assignment.

Assignment

The receipt of an exercise notice by an equity option seller (writer) that obligates them to sell (in the case of a short call) or buy (in the case of a short put) 100 shares of the underlying stock at the strike price per share.

At-the-Money

An option is at the money if the option’s strike price is equal to the market price of the underlying index.

Averaging Down

The price at which a seller offers to sell an option or a stock. See also Assignment.

Back Month

For an option spread involving two expiration months, the month that is farther away in time.

Back Spread

A Delta-neutral spread is composed of more long options than short options on the same underlying instrument. This position generally profits from a significant movement in the underlying instrument.

Bear (bearish) Spread

A Delta-neutral spread is composed of more long options than short options on the same underlying instrument. This position generally profits from a significant movement in the underlying instrument.

Bearish

A Delta-neutral spread is composed of more long options than short options on the same underlying instrument. This position generally profits from a significant movement in the underlying instrument.

Bid Price

The price at which a buyer is willing to buy an option or a stock.

Box Spread

A Delta-neutral spread is composed of more long options than short options on the same underlying instrument. This position generally profits from a significant movement in the underlying instrument.

Break Even

The stock price(s) at which an option strategy results in neither a profit nor a loss. While a strategy’s break-even point(s) are generally stated as the option’s expiration date, a theoretical option pricing model can be used to determine the strategy’s break-even point(s) for other dates.

Bull (bullish) Spread

The stock price(s) at which an option strategy results in neither a profit nor a loss. While a strategy’s break-even point(s) are generally stated as the option’s expiration date, a theoretical option pricing model can be used to determine the strategy’s break-even point(s) for other dates.

Butterfly spread

A strategy involving three strike prices with both limited risk and limited profit potential. Establish a long call butterfly by buying one call at the lowest strike price, writing two calls at the middle strike price, and buying one call at the highest strike price. Establish a long put butterfly by purchasing one at the highest strike price, writing two at the middle strike price, and buying one at the lowest strike price.

Buy-write

A covered call position includes a stock purchase and an equivalent number of calls written simultaneously. This position may be a combined order with both sides (buying stock and writing calls) executed simultaneously.

Calendar spread

An option strategy that generally involves the purchase of a longer-termed option(s) (call or put) and the writing of an equal number of nearer-termed option(s) of the same type and strike price.

Call Option

An option contract that gives the owner the right but not the obligation to buy the underlying security at a specified price (its strike price) for a specific, fixed period (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying product if the option is assigned.

Cash Settled

A settlement style that is generally characteristic of index options. Instead of stock changing hands after a call or put is exercised (physical settlement), cash changes hands. When an in-the-money contract is exercised, a cash equivalent of the option’s intrinsic value is paid to the option holder by the option seller (writer), who is assigned.

Class of Options

Option contracts of the same type (call or put) and style (American or European) cover the same underlying index.

Closing Transaction

A transaction that eliminates (or reduces) an open option position. A closing sell transaction eliminates or reduces a long position. A closing buy transaction eliminates or reduces a short position.

Commission

The fee charged by a brokerage firm for its services in the execution of a stock or option order on a securities exchange.

Condor spread

A strategy involving four strike prices with both limited risk and limited profit potential. Establish a long call condor spread by buying one call at the lowest strike, writing one call at the second strike, writing another call at the third strike, and buying one call at the fourth (highest) strike. This spread is also referred to as a flat-top butterfly.

Cost to Carry

The total costs involved with establishing and maintaining an option and stock position, such as interest paid on a margined long stock position or dividends owed for a short stock position.

Cover

To close out an open position. This term often describes purchasing an option or stock to close out an existing short position for either a profit or loss.

Covered Call Option Writing

An open short option position is entirely offset by a corresponding stock or option position. A covered call could be offset by long stock or a long call, while a long put or a short stock position could offset a covered put. This ensures that if the owner of the option exercises, the writer will not have a problem fulfilling the delivery requirements.

Covered Put Option Writing

The cash-secured put is an options strategy in which a put option is written against a sufficient amount of cash (or Treasury bills) to pay for the stock purchase if the short option is assigned.

Credit

Any cash received in an account from selling an option or stock position. With a complex strategy involving multiple parts (legs), a net credit transaction is one in which the total cash amount received is greater than the total cash amount paid.

Day Trade

A position (stock or option) that is opened and closed on the same day.

Debit

Any cash paid out of an account for purchasing an option or stock position. With a complex strategy involving multiple parts (legs), a net debit transaction is one in which the total cash amount paid is more significant than the actual cash received.

Debit spread

A spread strategy that decreases the account’s cash balance when established. A bull spread with calls and a bear spread with puts are examples of debit spreads.

Decay

A term used to describe how the theoretical value of an option erodes or declines with time, and time decay is quantified explicitly by Theta.

Delivery

The process of meeting the terms of a written option contract when notification of assignment has been received. In the case of a short equity call, the writer must deliver stock and receive cash for the stock sold. In the case of a short equity put, the writer pays cash and, in return, gets the stock.

Delta

The amount of a theoretical option’s price will change for a corresponding one-unit (point) change in the cost of the underlying security.

Discretionary

An investor gives the freedom to their account executive to use judgment regarding the execution of an order. Discretion can be limited, as in the case of a limit order that gives the floor broker price flexibility beyond the stated limit price to use their judgment in executing the order.

Early Assignment

The exercise or assignment of an option contract before its expiration. This feature of American-style options may be exercised or assigned at any time before they expire.

European-Style Option

An option contract may be exercised only during a specified period just before its expiration.

Exchange-Traded Fund (ETF)

A security that tracks an index, a commodity, or a basket of assets like an index fund but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. One of the most widely known ETFs is the Spider (SPDR), which tracks the S&P 500 index and trades under the SPY symbol.

Ex-Dividend Date

When a corporation declares a dividend, it will simultaneously declare a “record date” on which an investor must be recorded into the company’s books as a shareholder to receive that dividend. Also included in the declaration is the “payable date,” which comes after the record date and is the actual date dividend payments are made. Once these dates are established, the exchanges will then set the “ex-dividend” date (“ex-date”) for two business days before the record date. If you buy the stock before the ex-dividend date, you will be eligible to receive the upcoming dividend payment. You will not receive the dividend if you buy stock on the ex-date or afterward.

Exercise

To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying index.

Exercise Price (Strike Price)

The price per unit of which the underlying index may be purchased ( in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

Exercise Settlement Amount

The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.

Expiration Cycle

An Expiration cycle relates to the dates on which options expire. An option other than the LEAPS® will be assigned to one of three cycles: January, February, or March. At any point in time, PHLX sector index options have contracts with five expiration dates outstanding (three months from the March, June, September, and December cycles plus two additional near-term months).

Expiration Date

The day on which an option contract expires and ceases to exist. This is the Saturday following the third Friday of the expiration month for equity options. The last day on which expiring equity options trade and may be exercised is the business day before the expiration date, or generally the third Friday of the month.

Expiration Month

The calendar month during which a specific expiration date occurs.

Extrinsic Value

The portion of an option’s premium (price) exceeds its intrinsic value if it is in the money. If the option is out-of-the-money, the extrinsic value equals the entire premium. Also known as “time value.”

Fill-or-kill order (FOK)

A type of option order requires that the order be executed entirely or not. A fill-or-kill order is similar to an all-or-none (AON) order. The difference is that if the order cannot be wholly executed (i.e., filled in its entirety) as soon as it is announced in the trading crowd, it is killed (canceled) immediately. Unlike AON, a FOK order cannot be used as part of a good-’til-canceled order.

FINRA (Financial Industry Regulatory Authority)

The largest independent regulator for all securities firms in the United States.

FLEX® Options

Allow traders to specify option contract terms such as expiration date, strike price, exercise style (American or European), and the settlement value with a choice of either a.m. settlement (reported at the opening of trading) or p.m. settlement (reported at the close of trading).

Front Month

The month is nearer in time for an option spread involving two expiration months.

Gamma

A measure of the rate of change in an option’s Delta for a one-unit change in the underlying asset’s price.

Good-’til-canceled (GTC) order

A type of limit order that remains in effect until it is either executed (filled) or canceled. This differs from a day order, which expires unless executed by the end of the trading day. If not executed, a GTC option order is automatically canceled at the option’s expiration.

Hedge

A conservative strategy limits investment loss but affects a transaction that offsets an existing position.

Historic Volatility

A measurement of the actual observed volatility of a specific stock over a given period in the past, such as a month, quarter, or year.

Holder

The purchaser of an option.

Horizontal spread

An option strategy generally involves purchasing a farther-term option (call or put) and writing an equal number of nearer-term options of the same type and strike price.

Implied Volatility

An estimate of an underlying stock’s future volatility as predicted or implied by an option’s current market price. Implied volatility for any option can only be determined via an option pricing model.

Index Option

An option contract whose underlying security is an index (like the NASDAQ), not shares of any particular stock.

In-the-Money

A call option is in-the-money if the strike price is less than the market price of the underlying index. A put option is in-the-money if the strike price exceeds the underlying index’s market price.

Intrinsic Value

The amount by which an option is in the money (see preceding definition).

Iron Butterfly

An options strategy with limited risk and limited profit potential that involves both a long (or short) straddle and a short (or long) strangle. An iron butterfly contains four options, equivalent to a regular butterfly spread with only three options.

Last trading day (0DTE)

The last business day before the option’s expiration date, during which purchases and sales of options can be made. This is generally the third Friday of the expiration month for equity options. If the third Friday of the month is an exchange holiday, the last trading day is the Thursday preceding the third Friday.

LEAPS

Long-term Equity AnticiPation Securities, or LEAPS, are long-term option contracts. Equity LEAPS calls and puts can have expirations up to three years into the future and expire in January of their expiration years.

Leg

Noun: One part of a problematic position comprises two or more options and a position in the underlying stock.

Verb: Instead of entering one order to establish all parts of a complex position simultaneously, one factor is executed with the hope of establishing the other component (s) later at a better price.

Limit order

A trading order is placed with a broker to buy or sell stock or options at a specific price.

Long Option

A position wherein an investor’s interest in a particular series of options is a net holder (i.e., the number of contracts bought exceeds the number of contracts sold).

Long Stock

Shares of stock purchased and held in a brokerage account represent an equity interest in the company that issued the shares.

Margin Requirement (for Options)

The amount of cash and securities an option writer must deposit and maintain in a brokerage account to cover an uncovered (naked) short option position. This cash can be seen as collateral pledged to the brokerage firm for the writer’s obligation to buy (in the case of a put) or sell (in the case of a call) shares of the underlying stock in case of assignment.

Market Maker

An exchange member on the trading floor who buys and sells options for their account and who has the responsibility of making bids and offers and maintaining a fair and orderly market.

Market order

A trading order is placed with a broker to immediately buy or sell a stock or option at the best available price.

Mean

For a data set, the mean is the sum of the observations divided by the number of observations. The norm is often quoted along with the standard deviation: the mean describes the central location of the data, and the standard deviation describes the range of possible occurrences.

Naked or Uncovered Option

A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer has a short stock or deeper-in-the-money long call position. A short put position is uncovered if the writer is not short stock or long another deeper-in-the-money put.

Net Credit

Money received in an account either from a deposit or a transaction that results in increasing the account’s cash balance.

Net Debit

Money is paid from an account either from a withdrawal or a transaction that results in decreasing cash balance.

Neutral

An adjective describes the belief that a stock or the market will neither rise nor decline significantly.

Neutral Strategy

An option strategy (Or stock and option position) is expected to benefit from a neutral market outcome.

Normal Distribution

One of the most familiar mathematical distributions is a set of random observed numbers (or closing stock prices) whose distribution is symmetrical around the mean or average number. A graph of the distribution is the familiar “bell curve,” with the most frequently occurring numbers clustered around the mean or the middle of the bell. Since this is a symmetrical distribution, when the numbers represent daily stock price changes, there must be an equal price change to the downside for every possible change to the upside. The result is that a normal distribution would theoretically allow negative stock prices. Stock prices are unlimited to the upside, but a stock can only decline to zero in the real world. See “lognormal distribution.”

Opening Transaction

A transaction that creates (or increases) an open option position. An opening buy transaction creates or increases a long position; an opening sell transaction creates or increases a short position (also known as writing).

Open Interest

The net total of outstanding open contracts in a particular option series. An opening transaction increases the open interest, while any closing transaction reduces the open interest.

Open Purchase

A transaction in which the purchaser intends to create or increase a long position in a given series of options.

Opening Sale

A transaction in which the seller intends to create or increase a short position in a given series of options.

Option

A contract that gives the owner the right, but not the obligation, to buy or sell a particular asset (the underlying stock) at a fixed price (the strike price) for a specific period (until expiration). The contract also obligates the writer to meet the delivery terms if the owner exercises the contract right.

Option Period

The time from when a buyer or writer of an option creates an option contract to the expiration date, sometimes referred to as an option’s lifetime.

Option Pricing Model

A mathematical formula is used to calculate an option’s theoretical value using as input its strike price, the underlying stock’s price, volatility and dividend amount, time until expiration, and risk-free interest rate. The option Greeks are generated by an option pricing model: delta, gamma, theta, vega, and rho. Well-known and widely used pricing models include the Black-Scholes, Cox-Ross-Rubinstein, and Roll-Geske-Whaley.

Options Clearing Corporation (OCC)

OCC is the world’s largest equity derivatives clearing organization. Founded in 1973, OCC operates under the Securities and Exchange Commission (SEC) jurisdiction as a Registered Clearing Agency and the Commodity Futures Trading Commission (CFTC) as a Derivatives Clearing Organization. OCC provides central counterparty (CCP) clearing and settlement services to 16 exchanges and trading platforms for options, financial futures, security futures, and securities lending transactions.

Out-of-the-Money

A call option is out-of-the-money if the strike price exceeds the underlying index’s market price. A put option is out-of-the-money if the strike price is less than the market price of the underlying index.

Payoff diagram

A chart of the profits and losses for a particular options strategy is prepared in advance of the execution of the strategy. The diagram plots expected gains or losses against the underlying security price.

Physical Settlement

The settlement style of all equity options in which shares of the underlying stock change hands when an option is exercised.

Pin Risk

The risk to an investor (option writer) is that the stock price will equal the strike price at expiration (that option will be exactly at-the-money). The investor will need to determine how many of their written(short) options will be assigned or whether a last-second move in the underlying will leave any long options in or out of the money. The risk is that on the following Monday, the option writer might have an unexpectedly long (in the case of a written put) or short (in the case of a written call) stock position and thus be subject to the risk of an adverse price move.

Premium

The price of an option contract is determined by the competitive marketplace, in which the buyer of an option pays the option writer for the rights granted by the option contract. Often (Erroneously), this word is used to mean the same as time value.

Profit-Loss (Risk) Graph

A representation in graph format of the possible profit and loss outcomes of an equity option strategy over a range of underlying stock prices at a given point in the future, most commonly at option expiration.

Put Option

An option contract gives the holder the right to sell the underlying index at a specified price for a fixed period.

Ratio Spread

A term most commonly used to describe the purchase of an option(s), call or put, and the writing of a more significant number of the same type of options that are out-of-the-money concerning those purchased. All options involved have the same expiration date.

Realized Gains and Losses

The net amount received or paid when a closing transaction is made and matched with an opening transaction.

Relative Performance Index

An index that measures the total return performance of a target security relative to the adjusted actual return performance of a benchmark like the S&P 500.

Roll or Rolling

Close one option position simultaneously and open another with the same underlying stock but a different strike price and expiration month. Rolling a long position involves selling those options and buying others. Rolling a short position involves buying the existing position and selling (writing) other options to create a new short position.

Secured Put / Cash-Secured Put

An option strategy in which a put option is written against a sufficient amount of cash (or Treasury bills) to pay for the stock purchase if the short option is assigned.

Series

All option contracts of the same class have the same expiration date and strike price.

Settlement

The process by which the underlying stock is transferred from one brokerage account to another when equity option contracts are exercised by their owners and the inherent obligations assigned to option writers.

Settlement Price

The official price at the end of a trading session. OCC establishes this price to determine changes in account equity, margin requirements, and other purposes.

Short Option

A position wherein a person’s interest in a particular series of options is a net writer (i.e., the number of contracts sold exceeds the number of contracts bought).

Short Stock

A short position is opened by selling shares in the marketplace that are not currently owned (short sale) but instead borrowed from a broker/dealer. At a later date, shares must be purchased and returned to the lending broker/dealer to close the short position. If the shares can be bought at a price lower than their initial sale, a profit will result. A loss will be incurred if the shares are purchased at a higher price. Unlimited losses are possible when taking a short stock position.

Spread

A complex options position is established by purchasing and selling another option with the same underlying security. The two options may be of the same or different types (calls/puts) and may have the same or different strike prices and expiration months. A spread order is executed as a package, with both parts (legs) traded simultaneously at a net debit, net credit, or even money.

Standard Deviation

A statistical measure of price fluctuation. One use of the standard deviation is to measure how stock price movements are distributed about the mean.

Strike Price (Exercise Price)

The price per unit for which the underlying index may be purchased (in the case of a call) or sold (in case of a put) by the option holder upon exercise of the option contract.

Stop Order

A type of contingency order, often erroneously known as a stop-loss order, is placed with a broker. It becomes a market order when the stock trades or is bid or offered at or through a specified price.

Stop-Limit Order

A contingency order placed with a broker becomes a limit order when the stock trades or is bid or offered at or through a specific price.

Straddle

A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same strike price, expiration, and underlying stock. When both options are owned, the position is called a long straddle. When both options are written, it is a short straddle.

Strike / Strike Price

The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price or exercise price.

Target Component

The first component is identified in an Alpha Index, measured against the second component (“Benchmark Component”).

Theta

The amount of a theoretical option’s price will change for a corresponding one-unit (day) change in the days to the expiration of the option contract.

The Value

The portion of the option premium is attributable to the amount of time remaining until the expiration of the option contract. Time value is the option’s value in addition to the intrinsic value.

Time Decay

A regular phenomenon in which the time value portion of an option’s price decays (decreases) with time. The decay rate increases as expiration get closer, with the theoretical rate quantified by “theta,” one of the Greeks.

Time Spread

An option strategy generally involves purchasing a farther-term option (call or put) and writing an equal number of nearer-term options of the same type and strike price.

Time Value

For a call or put, it is the portion of the option’s premium (price) that exceeds its intrinsic value (in-the-money amount), if it has any. By definition, the premium of at- and out-of-the-money options consists only of time value. It is a time value that is affected by time decay and changing volatility, interest rates, and dividends.

Transaction Costs

All charges are associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise and assignment, exchange fees, SEC fees, and margin interest. The spread between the bid and ask is considered a transaction cost in academic studies.

Type

The classification of an option contract is either a call or a put.

Uncovered Put Option Writing

A short put option position in which the writer does not own an equivalent position in the underlying index or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

Undercover Call Option Writing

A short call option position in which the writer does not own an equivalent position in the underlying index represented by their options contracts.

Underlying

The asset (stock, futures, index) on which a specific option’s value is based changes hands when the option is exercised or assigned.

Vega

The amount of a theoretical option’s price will change for a corresponding one-unit (point) change in the implied volatility of the option contract.

Vertical Spread

Most commonly used to describe the purchase of one option and the writing of another where both are of the same type and have the same expiration month but have different strike prices.

Volatility

A measure of the fluctuation in the market price of the underlying index. Mathematically, volatility is the annualized standard deviation of returns.

Write or Writer

To sell a call or put option contract that has yet to be purchased (owned). This opening sale transaction results in a short position in that option. The seller (writer) of an equity option is subject to assignment at any time before expiration and takes on an obligation to sell (in the case of a short call) or buy (in the case of a short put) underlying stock if the assignment does occur.

Writer

The seller of an option contract.

 

 

 

 

 

 

0DTE Strategies, Archive

The Most Successful Traders Use a Playbook, You Should Too

Posted on by ernie
26
Dec

Introduction:

Trading can be an unpredictable and emotional endeavor, which is why it’s essential to have a clear strategy and guidelines in place. A trading playbook is a powerful tool that can help you do just that. It’s a document that outlines your trading strategy and provides a framework for making informed decisions about trades. 

In this article, we’ll explore the purpose and benefits of a trading playbook, as well as how to create and maintain one for continuous improvement in your trading performance. By having a structured plan in place, you can feel more in control of your trades and be better equipped to handle any potential setbacks or losses.

What is a trading playbook?

A trading playbook is a document that outlines your trading strategy and provides a framework for making decisions about trades. It can include a variety of elements, such as the types of trades you make, the conditions under which you make them, and the specific steps you take to execute the trade.

One of the main purposes of a trading playbook is to help you categorize and prioritize trades. By outlining the specific criteria that you use to determine whether a trade is worth making, you can more easily identify which trades align with your strategy and which ones don’t. This can help you make more informed decisions and avoid making trades that may not be in line with your long-term goals.

A trading playbook can also serve as a journal of sorts, helping you to document and track your trades over time. By keeping a record of your trades, you can analyze your successes and failures and learn from your experiences. This can be especially useful for identifying patterns and developing strategies that work best for you.

Benefits of using a trading playbook

There are numerous benefits to using a trading playbook, both in terms of mental and process-related benefits.

Mental benefits:

  • A trading playbook can help you find your best trades and improve your trading systems. By outlining the criteria you use to determine whether a trade is worth making, you can more easily identify which trades align with your strategy and which ones don’t. This can help you make more informed decisions and avoid making trades that may not be in line with your long-term goals.
  • A trading playbook can help you remove improper and loss-making trades and reduce the influence of emotions during trading. By following a structured plan, you can make decisions based on clear criteria rather than being swayed by emotions or impulsive decisions.
  • A trading playbook can help you hold trades longer for maximum profit and open trades with confidence. By having a clear strategy in place, you can feel more confident in your trades and be more willing to hold onto them for longer periods of time.
  • A trading playbook can help reduce distress during trading. By having a structured plan in place, you can feel more in control of your trades and be better equipped to handle any potential setbacks or losses.

Process benefits:

  • A trading playbook can help you increase position size in the best setups. By identifying the specific criteria that you use to determine whether a trade is worth making, you can more easily identify which trades align with your strategy and which ones don’t. This can help you make more informed decisions about position size and increase your position size in the best setups.
  • A trading playbook can help accelerate the study process and stop jumping from one strategy to another. By having a clear strategy in place, you can focus your efforts on learning and refining that strategy rather than constantly switching between different approaches.
  • A trading playbook can help you automate your most profitable setups. By identifying the specific criteria that you use to determine whether a trade is worth making, you can more easily identify which trades align with your strategy and which ones don’t. This can help you automate your most profitable setups and make trades more efficiently.

How to create and maintain a trading playbook

Creating and maintaining a trading playbook is a relatively simple process that can have significant benefits for your trading performance. Here are some steps for creating and maintaining a trading playbook:

  1. Identify the criteria you use to evaluate trades. Before you start creating your trading playbook, it’s important to determine the specific criteria you use to evaluate trades. This could include factors such as market conditions, risk-to-reward ratio, or any other criteria that you use to determine whether a trade is worth making.
  2. Document your trades. After each trading session, make a note of the trades that you made and the specific details of each one. This can include factors such as the type of trade, the entry and exit points, and any other relevant details.
  3. Review and analyze your trades. Set aside time to review and analyze your trades on a regular basis, whether that’s daily, weekly, or monthly. Take some time to review each trade in detail and think about what worked and what didn’t. Consider factors such as market conditions, your entry and exit points, and any other variables that may have contributed to the success or failure of the trade.
  4. Make adjustments to your trading strategy. Based on your analysis of your trades, you may need to make adjustments to your trading strategy. This could involve changing your criteria for evaluating trades, adjusting your position size, or making other changes as needed.
  5. Save your trades in a detailed format for future reference. It’s important to save your trades in a detailed format for future reference. This can be as simple as making a note in a word processor or spreadsheet, or using a note-taking app to save the trade details.
  6. Review and update your trading playbook regularly. It’s essential to review and update your trading playbook on a regular basis to ensure that it remains relevant and accurate. This can involve adding new trades, adjusting your criteria for evaluating trades, or making other changes as needed.

By following these steps, you can create and maintain a trading playbook that serves as a valuable reference and helps you make more informed decisions about your trades.

Here are a few tips for organizing and updating your playbook:

  • Keep it simple. Don’t try to include too much information in your playbook. Focus on the most essential details and keep it as concise as possible.
  • Review and update regularly. It’s important to review and update your playbook on a regular basis to ensure that it remains relevant and accurate. This can involve adding new trades, adjusting your criteria for evaluating trades, or making other changes as needed.
  • Use it as a reference. Your trading playbook should be a reference that you turn to regularly when making trades. Make sure to review it before making any decisions and use it as a guide for your trading strategy.

Using a trading playbook for continuous improvement

A trading playbook is an excellent tool for continuous improvement in your trading performance. By reviewing and analyzing your trades and playbook on a regular basis, you can identify patterns and areas for improvement and make adjustments to your strategy as needed.

Here are a few steps for reviewing and analyzing your trades and playbook:

  1. Set aside time to review your trades. Make a commitment to review your trades on a regular basis, whether that’s daily, weekly, or monthly. This will give you a chance to reflect on your performance and identify any patterns or areas for improvement.
  2. Analyze your trades in detail. Take some time to review each trade in detail and think about what worked and what didn’t. Consider factors such as market conditions, your entry and exit points, and any other variables that may have contributed to the success or failure of the trade.
  3. Make adjustments to your trading strategy. Based on your analysis of your trades, you may need to make adjustments to your trading strategy. This could involve changing your criteria for evaluating trades, adjusting your position size, or making other changes as needed.

Here are a few examples of how you might make adjustments to your trading strategy based on your playbook analysis:

  • If you notice that you tend to do well in certain market conditions but struggle in others, you might consider adjusting your strategy to focus more on the conditions in which you excel.
  • If you notice that you tend to do better with certain types of trades, you might consider increasing your position size in those trades or adding more of them to your playbook.
  • If you notice that you tend to struggle with managing your emotions during trades, you might consider incorporating techniques such as mindfulness or meditation into your trading routine to help you stay focused and avoid making impulsive decisions.

Conclusion

In conclusion, having a trading playbook is a valuable tool for any trader. It can provide a clear framework for making decisions about trades and help you identify and prioritize the best trades. It can also serve as a journal for documenting and tracking your trades, as well as a reference for your thought process when making trades. By using a trading playbook and regularly reviewing and analyzing your trades, you can improve your trading performance and achieve your long-term goals.


0DTE Strategies, Archive, strategy

The Importance of Keeping Trade Journal

Posted on by ernie
25
Dec

Introduction

Are you looking to improve your trading performance? One simple but powerful tool that can help you achieve your goals is a journal. By tracking your trades and analyzing your performance, you can identify mistakes and areas for improvement and make necessary adjustments to your trading strategy.

But a journal can be even more powerful when used with a trading playbook. A trading playbook is a document that outlines your trading strategy and guidelines for making trades. It can help you categorize and prioritize your trades based on their likelihood of success and make more informed decisions about when to enter and exit trades.

In this blog post, we’ll walk you through a process for using a journal and trading playbook to analyze and improve your trading regularly. We’ll cover the importance of keeping a journal, the benefits of using a trading playbook, and the steps for reviewing and analyzing your trades weekly and monthly. We’ll also provide a suggested journal format and tools for maintaining playbook entries. Following this process, you can continuously improve your performance and achieve your trading goals.

The importance of keeping a journal

Keeping a journal is an essential tool for improving your trading performance. A journal allows you to track your trades and analyze your performance, which can help you identify mistakes and areas for improvement and make necessary adjustments to your trading strategy.

There are several benefits to keeping a journal:

  • Performance analysis: A journal allows you to see how your trades have performed over time, which can help you identify trends or patterns in your performance. By reviewing your journal regularly, you can make necessary adjustments to your trading strategies, such as focusing on specific trade setups or more successful exit strategies.
  • Mistake identification: It’s natural to make mistakes when trading, but it’s essential to identify and learn from them to improve. A journal can help you identify common mistakes that you may be making, such as overtrading or not having a clear exit strategy. By reviewing your journal, you can learn from your mistakes and take steps to avoid repeating them in the future.
  • Decision-making improvement: A journal can help you improve your decision-making by allowing you to review past trades and evaluate the reasoning behind them. By reflecting on your thought process, you can identify any biases or mental traps impacting your trading. This can help you make more rational and disciplined decisions in the future.

Overall, keeping a journal is an essential tool for improving your trading performance. By consistently tracking and analyzing your trades, you can identify mistakes and areas for improvement and make necessary adjustments to your trading strategy.

The benefits of using a trading playbook

In addition to keeping a journal, another tool that can help you improve your trading performance is a trading playbook. A trading playbook is a document that outlines your trading strategy and guidelines for making trades. It can help you categorize and prioritize your trades based on their likelihood of success and make more informed decisions about when to enter and exit trades.

There are several benefits to using a trading playbook:

  • Categorizing trades: By categorizing your trades based on their likelihood of success, you can focus on the most promising opportunities and make more informed decisions about when to enter and exit trades. For example, you might define high-probability trades as those with a win rate of 70% or higher and a positive average return. In comparison, medium probability trades have a win rate of 50-70% and a positive average return, and low probability trades have a win rate below 50% or a negative average return.
  • Prioritizing trades: By prioritizing your trades based on their likelihood of success, you can allocate your capital and attention to the most promising opportunities. This can help you maximize your return on investment and minimize risk.
  • Promoting trades: You can use a promotion process to continually reassess and adjust your trade categorization as you learn more about the performance of different strategies. For example, if a low-probability trade performs well, you might consider promoting it to the medium-probability category.

Overall, a trading playbook can help you be more disciplined and strategic, leading to improved performance.

The weekly and monthly journaling process

Now that you understand the importance of keeping a journal and the benefits of using a trading playbook, let’s talk about reviewing and analyzing your trades regularly. We recommend doing this weekly and monthly to ensure that you are continuously learning and improving.

Weekly Process:

  1. Review your trades from the past week and document them in your journal. Could you be sure to include details such as the trade setup, execution, and results?
  2. Categorize your trades based on your trading playbook.
  3. Analyze your trades for performance by calculating key metrics such as win rate, the average return per trade, and maximum drawdown.
  4. Identify any mistakes or areas for improvement in your trading by reviewing your trade setups, execution, and results.
  5. Implement any necessary changes or adjustments to your trading strategy based on your analysis.
  6. Reflect on your progress and set goals for the following week.

Monthly Process:

  1. Review your trades from the past month and document them in your journal. Could you be sure to include details such as the trade setup, execution, and results?
  2. Categorize your trades based on your trading playbook.
  3. Analyze your trades for performance by calculating key metrics such as win rate, the average return per trade, and maximum drawdown.
  4. Identify any mistakes or areas for improvement in your trading by reviewing your trade setups, execution, and results.
  5. Implement any necessary changes or adjustments to your trading strategy based on your analysis.

Journal format

Now that you have a sense of the process for reviewing and analyzing your trades regularly let’s talk about the format of your journal. There are a few key elements that you should include to get the most value out of your journal.

  • Date and time of trade: It’s important to track when each trade was made, as this can help you identify trends or patterns in your performance over time.
  • Trade category: You should include the trade category as defined in your trading playbook, which will help you prioritize and analyze your trades based on their likelihood of success.
  • Trade setup: You should include details about the specific options and underlying assets you traded, as well as any relevant technical or fundamental analysis you used to evaluate the trade.
  • Execution details: You should include details about when you entered and exited the trade and any relevant notes or observations about the execution process.
  • Results: You should include the profit/loss for each trade and any relevant notes or observations about the outcome.
  • Analysis and reflection: You should include your thoughts and insights about the trade, including any mistakes or areas for improvement identified and any changes or adjustments made to your trading strategy.

By including these elements in your journal, you can create a comprehensive record of your trades that will help you review and analyze your performance, identify mistakes and areas for improvement, and make necessary adjustments to your trading strategy.

Conclusion

In conclusion, using a journal and trading playbook is a simple but powerful tool for improving your trading performance. By tracking your trades and analyzing your performance, you can identify mistakes and areas for improvement and make necessary adjustments to your trading strategy. Using a trading playbook, you can categorize and prioritize your trades based on their likelihood of success and make more informed decisions about when to enter and exit trades.

By following a regular process for reviewing and analyzing your trades on a weekly and monthly basis and using a consistent journal format, you can continuously improve your performance and achieve your trading goals. We’d like to encourage you to try this approach and see how it can help you reach your potential as a trader.

0DTE Strategies, Archive, strategy

10 Things to Consider with Trading 0DTE Options

Posted on by ernie
25
Dec


Introduction

Trading zero days to expiration (0DTE) strategies using options on the E-mini S&P futures can be lucrative to profit in the markets. However, traders must navigate several challenges and concerns to be successful. 

This complete guide will cover the major topics and concerns related to 0DTE options trading using the E-mini S&P futures as the primary asset type. We will discuss strategies for reducing high commissions and fees, managing assignment risks, understanding price differences between the ES and SPX, taking advantage of trading off hours, the pattern day trader rule and its impact on SPX options, contract specifications, and rollover events, the spread between the /ES and the SPX, using the ES for analysis with volume profile, comparing the ES and SPX options, and the best ES options strategies for 0DTE trading. This article is intended for retail and professional day traders looking to make informed decisions about 0DTE options trading using the E-mini S&P futures.

  1. Reducing High Commissions and Fees in 0DTE Options Trading
  2. Managing Assignment Risks in 0DTE Options Trading
  3. Understanding Price Differences Between the ES and SPX in 0DTE Options Trading
  4. Maximizing Returns with 0DTE Options Trading Off Hours
  5. The Pattern Day Trader Rule and SPX Options in 0DTE Trading
  6. Contract Specifications and Rollover Events in 0DTE Options Trading
  7. Exploring the Bid-Ask Spread Between the /ES and the SPX in 0DTE Options Trading
  8. Using the ES for Analysis with Volume Profile in 0DTE Options Trading
  9. Comparing ES and SPX Options in 0DTE Trading
  10. The Best ES Options Strategies for 0DTE Trading

Reducing High Commissions and Fees in 0DTE Options Trading

One of the significant challenges of 0DTE options trading using the E-mini S&P futures is the high cost of commissions and fees. These costs can eat into profits and make achieving a positive return on investment difficult. However, there are ways to reduce the impact of commissions and fees on your trading. 

One strategy is to choose a brokerage firm with a competitive commission and fee structures. Some brokers offer lower rates for high-volume traders or discounts for frequent trades. It’s also important to consider other fees, such as exchange and clearing fees, as well as any additional charges that may be applied to your trades.

Another way to reduce the impact of commissions and fees is to focus on trading strategies that minimize the number of trades you make. For example, consider using options spreads or other strategies that involve multiple legs instead of individual trades. These strategies can help you achieve your investment objectives while minimizing the cost of commissions and fees.

You can also choose strategies where the asymmetry between risk and the potential reward is significant enough that the range and potential of possible returns diminish the trade cost.

Managing Assignment Risks in 0DTE Options Trading

Another concern for traders using 0DTE options on the E-mini S&P futures is the assignment risk. When you hold a long call or put option, there is always the risk that the holder of the option will assign you an exercise notice after expiration if any of your position is in the money (ITM). You are obligated to buy or sell the underlying asset at the agreed-upon strike price. 

This can be especially problematic in the case of 0DTE options because the assignment will happen after the cash market closes. If you can not cover the margin requirements, your broker will close the position for you and likely lock your account from further future trading. You will need to beg them for access to futures trading to be returned to you. Don’t expect them to return it if you do it a second time.

To manage assignment risks in 0DTE options trading, you can use strategies such as closing out your position before expiration or rolling your position to a different expiration date. You can also use tools such as covered call writing or protective puts to mitigate the assignment risk. It’s important to carefully consider the potential risks and rewards of any 0DTE options trade and choose strategies that align with your investment objectives and capacity and tolerance for risk.

Understanding Price Differences Between the ES and SPX in 0DTE Options Trading

Another important consideration in 0DTE options trading using the E-mini S&P futures is the price difference between the ES and the SPX. The ES and SPX are both based on the S&P 500 index, but they have some key differences that can affect the price of options. For example, ES options are based on the underlying ES futures contract, while the SPX is an options contract based on the spot price of the index. Additionally, the ES is traded on the Chicago Mercantile Exchange (CME), while the SPX is traded on the Chicago Board Options Exchange (CBOE), which can also affect pricing.

In the case of the S&P index, the spot price represents the current level of the index based on the prices of the individual stocks that make up the index. On the other hand, a futures contract is an agreement to buy or sell an asset at a predetermined price on a specific future date. The futures price of the S&P index represents the expected price of the index at the time the futures contract expires.

The spot price of the SPX reflects the current market price, while the futures price reflects the expected price at delivery, which happens when the futures contract expires. The E-mini futures contract has four expiration dates per year; December (ESZ), March (ESH), June (ESM), and September (ESU). 

At the time of expiration, the price of the futures contract and the price of the Index are nearly identical. However, the new futures contract for the coming expiration is priced differently. And when the market rolls from the previous futures contract to the new contract, there is often a significant discrepancy in price. The forward, new, or front contract is usually priced higher than the index. This forward pricing situation is called contango.

This can confuse the options trader because they have two options contracts, one for the futures and one for the index, both based on the S&P market, yet there is a significant gap in the pricing. As the contract ages and approaches expiration, this price differential degrades until the time has come for the current or front contract to expire, where it again reaches price parity with the SPX price.

Maximizing Returns with 0DTE Options Trading Off Hours

One way to maximize returns in 0DTE options trading is to take advantage of trading off hours. The markets are open for a limited time each day, and trading activity tends to be highest during regular market hours. However, there are also opportunities to trade during off-hours, such as before or after the market closes.

Trading off hours can be riskier than trading during regular market hours because there is typically less liquidity and greater price volatility. However, there can also be opportunities to capture moves in the market that might not be possible during regular hours. Some specific opportunities to consider when trading 0DTE options during extended hours include the following:

  • Economic reports: Economic reports can move markets and provide opportunities for traders to capture profits.
  • Volatility as Asian and European markets open: As other markets open, there may be an increase in volatility that traders can take advantage of.
  • Geo macro events: Major news events or geopolitical developments can affect market prices and provide opportunities for traders to profit.
  • Federal Reserve governors: Comments or statements from Federal Reserve governors can affect market expectations for future rate hikes, providing potential trading opportunities.
  • Earnings reports: Earnings reports from heavyweight companies can affect market prices and provide opportunities for traders to profit.

To maximize returns with 0DTE options trading off hours, it’s essential to monitor market conditions carefully and be prepared to act quickly if necessary. It is also necessary to understand the underlying assets and market factors that may affect their prices. In addition, traders should consider using strategies such as limit orders, stop-loss orders, and futures contracts to manage risk and take advantage of potential opportunities. Finally, traders should utilize tools and resources such as trading platforms with extended trading hours, market news and analysis, and real-time price quotes to stay informed and make informed trading decisions.

The Pattern Day Trader Rule and SPX Options in 0DTE Trading

The pattern day trader (PDT) rule is a regulation that applies to traders who make four or more day trades within a rolling five business day period. If you are classified as a PDT, you must maintain a minimum account balance of $25,000. If your account falls below this threshold, you can make further day trades once you meet the minimum balance requirement.

The PDT rule can be especially relevant for 0DTE options traders using the SPX, as the high volume and frequency of trades associated with 0DTE strategies can trigger the rule quickly. You understand the PDT rule and how it may impact your 0DTE options trading using the SPX. You may need to adjust your trading strategies or consider using alternative assets to avoid triggering the rule.

There are a couple of strategies for accounts smaller than $25,000 that you can employ to avoid being categorized as a pattern day trader and having your account restricted.

  • Trade less and manage the number of trades you open and close in a five-day rolling widow. Most trading platforms will indicate the number of remaining transactions you have before you are in violation.
  • Trade with the E-mini S&P futures contract, which is not subject to the PDT.
  • Employ the Pattern Day Trader Hack. This is a strategy developed by our group. The basic strategy is that you open trades but never close them. You lock in profits by opening the opposite trade as the position with unrealized gain and then allow both to expire. This locks in the profit; your account will reflect that upon settlement.

Contract Specifications and Rollover Events in 0DTE Options Trading

When trading 0DTE events, you want to ensure that your risks are minimized and that you fully understand the assets you are trading. This means you should know everything about the specifications of the contracts and how they behave under all the circumstances you will encounter.

We trade options on the S&P futures and SPX because they are European-style options, meaning there is no assignment until after expiration. Therefore there is no risk of early assignment. This is important because an early assignment could ruin your day when you are near a pinned trade and your trade collapses because of an assignment event or a broker enforcing their margin rules.

If you take the position into expiration, you need to know that if any portion of your position is in the money, you will be assigned. With the SPX, this is no problem because the position is cash-settled; there is no underlying asset to be assigned to the SPX. The ES, however, has an underlying futures contract, so if you are in the money, you will be assigned a futures contract, which could impose market and margin risks. So either you should be prepared for this assignment possibility or leave the position before expiration. The latter choice is preferred.

Another contract fact that you must be aware of with the E-mini S&P futures is that rollover events can affect your trades.  Rollover refers to closing a contract and opening a new one with a different expiration date. Rollover events can occur when the current contract nears expiration and a new contract with a later expiration date becomes available. Rollover events can affect the price of options and the profitability of trades, so it’s essential to understand how they work and how they may impact your business.

Of particular importance is that you know when the final day of the futures options contract expires. On that day, the expiration will be an AM or morning expiration, meaning the contract will expire at 9:30 AM eastern time. If you take a position before the cash market opening and are unaware of that early expiration, if any of your position is in the money (ITM), you might risk assignment by holding the contract into expiration.

Exploring the bid-ask Spread Between the /ES and the SPX in 0DTE Options Trading

The bid-ask spread is the difference between the bid price (the highest price a buyer might pay) and the asking price (the lowest price a seller might take). The bid-ask spread is also a measure of market liquidity and can significantly impact the price you pay for your options.

In the case of options for the e-mini S&P futures (ES options) and options for the SPX (SPX options), the differences in the bid-ask spread are relatively minor. The differences exist primarily due to volume in the respective markets, with a slight edge in the ability to fill a position going to the SPX.

Options for the E-mini S&P futures (ES) have approximately 1/4 the volume of the SPX. So, given that, one might expect the bid-ask spread to be wider and less liquid on the ES compared to options on the SPX. For most traders, those trading under ten contracts per position, this advantage is hardly noticeable, if at all. Most limit orders for ES and SPX are filled at the mid-price almost immediately (within 5-10 seconds). Of course, this largely depends on the volatility in the market. 

This is true when trading multi-leg options like the butterfly or condor, where you must fill four contracts simultaneously. In my experience, you rarely have to change the price of your order to more than 10 to 20 cents, often only 5 cents, to get an immediate fill on a multi-leg position.

Some factors that might make it more challenging to get a fill are specifying a particularly wide spread or one that is very far out of the money. Also, selecting a broken wing fly that has strikes far out of the money, and in some cases, unbalanced flies, which have two additional contracts to fill over a regular butterfly that has a total of 4 contracts.

The most significant difference in the ability to fill an options position cannot be compared directly between the ES and SPX. And that is opening positions during non-market hours, which for most traders is only available for options on the ES. Most retail brokers do not offer extended hours trading for the SPX. However, even during the low volume, extended market, and Globex market hours, options for the E-mini S&P futures (ES) are relatively easy to fill, even multi-leg positions.

Using the ES for Analysis with Volume Profile in 0DTE Options Trading

Volume Profile is a technical analysis tool that helps traders understand a particular asset’s supply and demand dynamics. By analyzing the volume of trades at different price levels, traders can understand the buying and selling pressure in the market and make informed decisions about their trades.

The E-mini S&P futures (ES) can be helpful for volume profile analysis in 0DTE options trading. By analyzing the volume of trades at different price levels in the ES, traders can see objective evidence of where traders find more value and where it finds less value in the market. These changes in the volume reveal levels of inflection, where the market will discover natural support and resistance levels, as well as areas of high and low liquidity, which affects the behavior of price movements. Understanding how volume profile works and how it can be applied to the ES in 0DTE options trading is essential.

The SPX has no volume because it is a calculated index; it’s not traded, therefore, can have no volume. So, if you want to use the volume profile to analyze the SPX, you must use the E-mini S&P futures contract and its volume profile as a surrogate. This will provide a real-time tool that moves with a very high degree of correlation because they are derivatives of the same underlying market. The price may differ, depending upon what stage the futures contract is into its quarterly contract, but this is a simple adjustment and should provide no problem.

Comparing ES and SPX Options in 0DTE Trading

As mentioned, the ES and the SPX are both based on the S&P 500 index and can be used for 0DTE options trading. However, there are some critical differences between the two that traders should consider when making their trading decisions.

One significant difference is the underlying assets: the ES is a futures contract, while the SPX is an options contract. This can affect options pricing based on these underlying assets, margin requirements, and other factors. Additionally, the ES is traded on the CME, while the SPX is traded on the CBOE, which can also affect pricing and other aspects of trading.

The most significant difference between the options of the two assets is the size of the contract. The SPX is more than two times as large. Also, the multiplier is different. The SPX has a multiplier of 100, just like stocks; however, the E-mini S&P futures have a multiplier of 50. So, this is a difference that traders should be aware of to size their positions appropriately.

Another significant difference is with an assignment. You can be assigned a futures contract if your position is in the money at expiration with the E-mini S&P futures. This is a risk traders should be aware of, so they can manage. The SPX options are cash-settled. Therefore there’s no assignment risk.

There is one more significant difference: while technically, the ES futures and the SPX can be traded 23 hrs per day, very few retail brokers support around-the-clock trading for the SPX. Instead, they only support cash market hours. Both assets, however, expire at the same time, 4 PM eastern time each trading day.

To compare ES and SPX options in 0DTE trading, traders should carefully consider the pros and cons of each asset and choose the one that best aligns with their investment objectives and risk tolerance.

The Best ES Options Strategies for 0DTE Trading

Trading 0DTE options are about taking advantage of the exponential decay of premiums in those final hours of expiration. So, to maximize your returns, choose option strategies that are premium collectors and take advantage of quick changes in volatility. At the same time, you’ll want your position as asymmetric as possible with small defined risk, which means looking for strategies that are put out of the money.

In our experience, the two option strategies that meet these criteria are the butterfly and the condor. We like the calendar as well for its sensitivity to changes in volatility. However, it is a more niche choice. Let’s look at our favorite, the one we call the 0DTE classic, and examine its pros and cons during a 0DTE event.

The butterfly is a composite of the vertical spread, it can use all puts or calls, or you can use both puts and calls. Our preference is the more straightforward option using only one option type. The butterfly is remarkably flexible as a directional strategy; when used as a neutral strategy, where you place the strategy centered at the money, it loses much of its flexibility.

The primary advantage of placing the butterfly out of the money is the asymmetric risk-to-reward profile you can create. The further from the money you put it, the greater the asymmetry. Of course, the further you place also reduces your probability of profit and touch, so there are practical limits or sweet spots that we have found that work in varying market conditions.

The other primary way to control both its asymmetry and potential with the butterfly is to vary the width of the composed verticals. Our preferred orientation is to use equal-sized spreads, we call this a symmetric butterfly, and we notate it by referring to the width of one vertical. So, the butterfly was 25 wide and centered on SPX 3975, or using our shorthand; it would be 25W @ 3975.

As it is directional and placed above or below the market, our success rate depends on getting the right direction. Our most basic strategy for choosing a direction is to use a primary moving average, like the 50 EMA, and open a bullish position when above the average and a bearish position when below the average.

Strategy management is simple if the market goes in the wrong direction. You do nothing because you have a small defined risk; you accept that outcome. In some cases, the market will reverse, allowing you to manage profits, and in some cases, it won’t, and we often take a total loss. If the market goes in our direction, then we have a variety of profit management strategies based on market conditions and structure.

The condor is similar to the butterfly but does not afford the same degree of asymmetry. We use it when the implied volatility is at extremes. The calendar is also used in special conditions where volatility is anticipated to change abruptly.

We also have a market-neutral version of the butterfly. We place two Classic Flies on either side of the current market price, using similar asymmetry but with modified risk and profit management.