Options are financial derivatives that grant the buyer the right but not the obligation to buy or sell an underlying asset at a predetermined price (strike price) within a specific period (expiration date). Zero days to expiration (0DTE) options like those traded with the S&P 500 Index $SPX, the NASDAQ 100 Index $NDX, and the corresponding ETF’s SPY , QQQ, several others are options that expire on the same day they are traded. These options have very little to no time value and are priced purely based on the intrinsic value of the option. The VIX, or the CBOE Volatility Index, is a measure of the market’s expectation of near-term volatility, based on S&P 500 index options. The VIX tends to increase when the market is experiencing a period of uncertainty, fear, or panic, and decrease when the market is stable and calm. However, the impact of 0DTE options on the VIX is relatively small, as they do not contribute much to the implied volatility of the market.
Delta is a measure of the sensitivity of an option’s price to changes in the price of the underlying asset. The delta of an option is affected by several factors, including the price of the underlying asset, time to expiration, volatility, and interest rates. However, the impact of 0DTE options on delta is significant. 0DTE options have a delta of either 1 or -1, depending on whether they are call or put options. This means that 0DTE options are highly sensitive to changes in the price of the underlying asset, and can experience significant price movements even for small changes in the price of the underlying asset. For an inexperienced trader, this can mean extreme gains or excessive losses in just a matter of seconds. The risk associated with trading 0DTE options is extremely high.
Gamma is a measure of the rate of change of an option’s delta in response to changes in the price of the underlying asset. The gamma of an option is affected by several factors, including the price of the underlying asset, time to expiration, volatility, and interest rates. 0DTE options have a very high gamma due to their high delta. This means that the delta of 0DTE options can change rapidly in response to changes in the price of the underlying asset. As a result, 0DTE options can experience large price movements, both positive and negative, in a very short period.
In conclusion, 0DTE options have significant impacts on delta and gamma due to their high sensitivity to changes in the price of the underlying asset. However, their impact on the VIX is relatively small, as they do not contribute much to the implied volatility of the market. Traders who want to take advantage of the rapid price movements of 0DTE options should be aware of their high gamma and use appropriate risk management strategies involving setting stop losses, limiting exposure to less than 1% of your portfolio value, or just trade options with 1 or more days till expiration.
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