There isn’t just one type of option to trade following a 0DTE strategy. Use the info below as your reference guide to build familiarity with the available choices.
The following optionable S&P asset types can hypothetically be used to trade a 0DTE strategy, although we’ll soon see that some are much more suitable than others:
- E-mini S&P futures and micro futures
- SPX and XSP index futures
- SPY Exchange Traded Fund
Similarities and Differences
XSP, Micro Index, SPY, and SPX
The SPX, XSP index and micro index, and the SPY are considered equities. That means they are subject to the Pattern Day Trader (PDT) rule.
The Securities and Exchange Commission (SEC) explains that options traders and all others who execute four or more day trades within five business days qualify as PDTs. Those who fit into this definition must maintain $25,000 in their account at all times. Otherwise, they are not allowed to trade.
Additionally, PDTs can have their day trading buying power limited if they trade more than four times their maintenance margin excess. That results in a margin call that the PDT must answer in five days and a limitation of buying power to two times their maintenance margin excess.
You can’t trade these four indexes directly because they are calculated things. In other words, there’s nothing to trade. You can, however, trade options on them. They can only be traded during market hours.
ES & MES
The E-mini S&P futures and micro futures (ES and MES respectively) are futures contracts, and they are not subject to the PDT rule. Also, they can be traded 23 hours a day, 5.5 days a week.
Only the ES and the SPX can be traded 5 days a week, micro versions are traded only 3 days a week. Also, the futures and indexes are both, along with their micro versions, considered European-style options. That means there’s no assignment pre-expiration. The SPY is an American-style option and can be assigned prior to expiration.
The Futures and the Index assets (including trading with options) have special tax treatment upon annual reporting. The first 60% of profits are taxed at the capital gains rate, the last 40% are taxed at the trader’s nominal tax rate. IRS Form 6781, while dry in its wording, can give you more context. The SPY is taxed at just the nominal tax rate.
When you boil all this down, the only two acceptable asset types to trade with 0DTE strategies are the E-mini Futures contract (ES only) and the SPX index, not the XPS micro.
Wondering about the difference between SPX and SPY, or how to choose SPY vs. SPX options? There’s really no question that the SPX index is the only reasonable choice.
Which is preferable for 0DTE: ES or SPX?
There are further differences between the ES and SPX that will make one preferable over the other under certain circumstances for trading on the expiration date.
The ES is traded around the clock. That means it is a real asset. So, it has volume, which can be used with technical analysis. This is absolutely necessary to 0-DTE strategies as the volumetric analysis using Volume Profile is indispensable.
You can be assigned after expiration, futures contracts, which can be a risk if not handled properly. And there’s no PDT rule to worry about, so you can trade all you want without restriction. It is also about 1/3 the size of the SPX option in terms of margin. Commissions are generally high, as much as 6 times that of the SPX.
The SPX can only be traded during market hours, is subject to the PDT and it has no volume, so you can’t use it for analysis. You must use the ES as a substitute during analysis. Two major benefits:
- It is cash-settled, so no assignment risk
- The commissions are very cheap
Our Choice at 0-DTE
So, the reality is that the 0-DTE trader needs both the ES and the SPX if they want to trade just the SPX. They need the ES for analysis, and the SPX for the lack of risk and cost. The around-the-clock charting and volume make analysis with the ES the only option.
If a trader chooses to only trade the ES, they can do so without the need to ever use the SPX for any reason. However, our preference is to trade the SPX options and use the ES for analysis. We trade the ES only on rare occasions when a trade might be made outside market hours. Otherwise, it is cost-prohibitive.
Education and Coaching That Supports 0DTE Success
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