Derivatives Market Research

Debunking Options Myths

Are the misconceptions fueled by recent 0DTE confusion preventing you from fully harnessing the potential benefits of options trading? We’re turning to the facts to set the record straight.

Among the critical building blocks of a well-diversified investment portfolio are options. Yet, options trading ranks high among the most well-preserved myths about the industry. “Trading options is only for seasoned professionals,” they say. The list goes on, perpetuating the myth that options are only for certain people, and you’re not smart enough to join that club. This rhetoric scares people from even exploring options trading, ruling out an entire spectrum of tools for investors.

In reality, options are among the best financial tools for enhancing and protecting a portfolio, or even speculating about current events. They may not be as straight forward as single-stock investing, but options are not beyond understanding for the vast majority of people trying to build their own financial future. In fact, bringing exchange-traded options to the masses was Cboe’s original intention when listed options trading was introduced in 1973. From their inception, options were designed to reduce volatility in an investor’s portfolio by defining the outcome they wanted upfront. Defined outcome strategies like collars, iron condors and butterflies tailor investment outcomes by defining specific price ranges and risk profiles. Options provide leverage with limited risk and allow customization of strike prices and expiration dates.

Yet, the misconceptions around trading options are among the most perpetuated myths in our industry.

The rhetoric on both ends of the spectrum either scares people from exploring options trading or entices them to rush into using a product they don’t fully understand. Neither is good, and as more retail investors enter the market, it’s more important than ever that investors understand options are among the most effective financial tools for managing risk, generating income and enhancing portfolio diversification.

And, while complicated, they are not beyond understanding for the vast majority of people trying to build their own financial future. Options are powerful tools accessible to those with the willingness to learn. It's time to bust these myths, tone down the hyperbole and start to tell the factual, well-informed story on the value and utility of options.

A Little Bit of “0DTE” History

Options, specifically short-dated options, are anything but new. Any option, at some point in its lifetime, will offer the opportunity to trade on its day of expiration – more on that later. So, let’s start at the beginning. When listed options debuted in 1973, expirations, or the day when an option contract terminates, were quarterly. As the years went on, monthly and weekly expirations were introduced on options contracts to accommodate growing market demand. Cboe^® introduced SPX^® Weeklys options in 2005, gradually expanding to daily expirations by 2022, providing more opportunities for trading on the day the contract expires. Read more on Insights for full details on the evolution of same-day options trading.

Short-dated vs. 0DTE

So what does all this mean? Some index and ETF options have weekly expirations that expire each day of the trading week (Monday through Friday) but there are no such daily expiring options on single stocks. That is, there is currently not a single name equity options series in existence that has listed expiries for every day of the current trading week.

What about dailies? There’s no such thing! What some may call a daily-expiring option is actually a weekly option. Same-day expiring options, or 0DTE options trading, refer to investors buying and then selling options, typically Weeklys, on the day they expire. For example, Cboe offers SPX and RUT^® Weeklys contracts. These are options based on indices —the S&P 500^® and Russell 2000^®, respectively — that have expirations each day of the week, Monday through Friday. Some select single name stocks are available with weekly expiring options on Friday only.

As we said before, any option, at some point in its lifetime, will offer the opportunity to trade on its day of expiration. Same-day trading has occurred since the invention of listed options in 1973. What has changed recently is that far more investors are now opening new positions – and not just closing existing positions – on expiration days.

If someone says they are trading 0DTE TSLA options, here’s what they may have meant:

They purchased a weekly expiring option for that Friday on the same day, providing three or four trade opportunities within the month.
They purchased a standard monthly expiring option for that Friday on the same day. Standard monthly options expire on the third Friday of the month.

If you look at the options chain for TSLA in April 2024, for example, you’ll see there are four expirations: April 5, 12, 19 and 26. Someone could put on a same-day trade by purchasing a TSLA option – and then closing that position intraday – on any of those four expiration days. Remember, options are listed ahead of time. For example, SPX Weekly Options (with daily expirations) are listed 4 to 5 weeks in advance of expiration.

Why People Trade Short-Dated Options

Now that we understand what short-dated and 0DTE options trading is, let’s get into some more about why people might want to trade short-dated options. Despite recent media coverage disparaging 0DTE strategies as non-buy-and-hold, it's important to recognize that 0DTE trading isn't solely speculative in nature.

Trading—whether in options, equities or otherwise—allows people to express their views of the markets, a stock and the current events that impact both. People worldwide form their own hypotheses about how the day’s news will affect sectors and businesses. With options, people can put those hypotheses to work in the market without deploying all their capital. Options give people agency and a place in the market, without requiring that they put all their eggs in one basket. Specifically, short-dated options trading serves as a valuable tool in investors' toolkits, offering opportunities for asset protection, income generation and short-term directional plays.

With a focus on macroeconomic events like inflation data and Fed policy meetings that have the potential to trigger large market moves, traders are shortening their time horizons and using near-term options to express views. With certain options that offer maturities on every day of the week, investors are now trading and hedging with greater flexibility and precision. In today's market, where some events are binary in their outcomes, 0DTE options enable investors to quickly reposition to try to take advantage of rapidly changing market conditions. These options are cost-effective, help traders manage risk and provide opportunities for targeted strategies.

0DTE Options Trading Is Well-Balanced

Splashy articles about uninformed investors or flamboyant message board users would have the average reader assume 0DTE trading is unbalanced, with the odds stacked against individual investors. Our research shows this couldn’t be farther from the truth. (In fact, Mandy Xu has much to say about 0DTE trading on Insights). Cboe data shows that SPX 0DTE options trading is remarkably well-balanced, liquid and orderly, with over 95% of customer opening volume exhibiting a capped risk profile. Note, as an exchange operator, Cboe has access to datasets that indicate whether an option trade was a buy or a sell. With incomplete data, articles can only make assumptions about trades, potentially fueling broader misconceptions.

The 0DTE options market boasts a broad user base, with retail investors alongside institutions, banks, market makers and liquidity providers. This diversity fuels a dynamic market environment. Investors employ a wide range of tactics. Some sell options to generate income (yield), while others buy options to make short-term directional predictions. Importantly, nearly half involve risk-defined spread trades, limiting potential losses. This balanced flow between buying and selling minimizes the need for extensive market maker hedging, further reducing potential market disruption.

Using Cboe data, we estimate institutional participation at 60-70% based on trade size, complexity and frequency. The 0DTE options market offers opportunities for various participants, not just a select few. With a balanced flow of strategies and a significant presence of retail investors, it's a dynamic environment where education is key to success.

A Case Study Using Meta Options

Weeklys have been around for years, and the practice of speculating on an earnings move even longer. Put simply, when a company like Meta reports its earnings and does better than expected, its stock price can go up by a large amount – an outsized move beyond pre-earnings expectations. Instead of relying solely on luck or instinct, investors can use mathematical tools to make smart trades with a higher chance of success.

In the chart below, you can see that before Meta's earnings report on Feb. 1, the market expected the stock price to move about 6% based on options pricing. This implied move is shown in blue. However, after the earnings were announced, the stock price actually moved by 20%, the green bar.

Meta Earnings Options Trade

Let’s say an individual investor purchased a weekly call option on Meta within 24 hours of the option’s expiration, which could be called a 1DTE options trade. The individual purchased the option, the market closed, Meta reported earnings and then the next day, the individual sold their option for a significant profit due to the 20% upside move in the underlying Meta stock.

Though someone might say they were just taking a chance by trading around Meta's earnings, there's a solid argument for making trades that benefit from the stock's potential movements during/after earnings announcements. Essentially, investors can strategically buy/sell contracts that give them exposure to these big moves affected by known events, such as Fed chair testimonies, influential industry conferences, political elections and other special situations.

Meta Earnings Stock Trades

Let’s look at a few different possible scenarios. Now, suppose the investor was long 100 shares they purchased before market close Thursday headed into the post-market earnings release. Purchasing those 100 shares would have cost roughly $39,400 and netted some $8,000 in paper profits after the announcement (if the position was exited at the close of trading Friday). Buying a short-term option prior to earnings – whether it was 1, 2 or 7 days to expiration – to express the same bullish view (albeit on a different time horizon) would have cost a fraction of that and offered the investor similar exposure to the upside.

Specifically, an at-the-money call option (395 strike) expiring Friday and purchased at the close on Thursday cost $1,200. So, for $1,200 a call buyer could have gotten the same notional exposure as the investor who spent $39,400 to be outright long 100 shares of the stock.

Say the investor in question instead had a bearish view on Meta and shorted 100 shares of stock in advance of earnings. After Meta’s 20% move to the upside, that investor would have been sitting on approximately $8,000 of paper losses (and probably a margin call from their broker). If they were still hanging on to their short position by market close March 28, that investor would be down about $9,700 (based on META’s closing price of $491.35 on April 1). Shorting any stock leaves an investor potentially on the hook for unlimited losses and requires a substantial outlay of capital to initiate the short position. Moreover, that investor would be paying borrow costs to short the stock, which – even if the position was working in the investor’s favor – would be eating into their returns.

Conversely, what would have happened if Meta dropped 20% after earnings? Well, pretty much the same as the above but in reverse – the short position would be sitting on $8,000 of gains and the investor long Meta stock would have seen the value of their holdings decline from $39,400 to $31,400. Meanwhile losses from a purchased options contract (representing 100 shares of stock) are limited to the premium paid for the put or call. A Meta bear purchasing put options ahead of a positive earnings report would be down far less than the $8,000 of the investor short Meta stock, and a Meta bull purchasing call options into a (hypothetically) poor earnings report would similarly be down far less than the $8,000 loss of the investor long Meta stock. Using the prior example, the investor who purchased the 395 strike 1DTE call for $1,200 the day before earnings would be limited to a $1,200 loss.

The math doesn’t lie, there is less downside risk buying calls/puts vs. buying/shorting stock in this scenario. Investors are not required to buy or sell that stock (so long as they do not hold the position through expiration), and potential losses are capped at the premium they paid— a fraction of the stock price. Options can provide a buffer against potential losses in the stocks investors own. Keep in mind, these are simple options trading examples. As investors learn more about the instrument, they can get increasingly creative with the trades they structure.

The Options Ecosystem

0DTE options trading is typically part of a wider investment strategy within a portfolio. Options, like stocks and ETFs, can be bought and sold to gain exposure to various markets. The options narrative is often focused on simple directional views (buying calls if you think a stock will go up, buying puts if you think it will go down), but the utility of options goes far beyond that. Options can be used to hedge existing holdings, reducing overall portfolio volatility. Again, this is a similar concept to purchasing any type of insurance. For example, if you buy car insurance – you don't expect an accident, but it provides protection if one occurs. The goal isn’t the payout, the goal is to make it home safely.

Of course, options strategies can also be used to generate income. Understanding the potential profit, loss and breakeven point is crucial before using options, but they shouldn't be viewed solely through a profit and loss lens. Just like insurance, options can play a valuable role in managing risk and protecting your investments.

Speculation

That brings us to the elephant in the room – speculative trading with options. Is there a subset of investors using short-term, 0DTE options and options overall speculatively? Most certainly. Is speculation bad? Not necessarily. Truthfully, every investment could be considered speculation in some form or fashion. Speculative investing has existed for millennia and can be employed across various asset classes -- including stocks and ETFs. As mentioned in our META example, it is important to note that the difference between speculating via buying a call option versus buying a stock can be significant. If the trade moves against the intended strategy, an investor’s loss is limited to the premium paid for the option, whereas they would face a potentially much larger loss by owning the stock itself.

Looking within Cboe’s own SPX options complex, we see most traders are taking a very systematic approach to trading SPX 0DTE options. Less than 5% of volume in newly opened customer positions is selling naked calls/puts, for instance, as customers typically take a risk adverse approach to trading SPX – making this very different from the meme-stock trading craze during the pandemic era.

Knowledge Is Power

Education plays a pivotal role in options trading, especially for newcomers to the market. While Cboe doesn't directly grant options accessibility to retail investors, we collaborate with brokerage partners to enhance educational offerings. Brokerage firms conduct suitability assessments to approve customers for trading options, emphasizing the importance of informed decision-making. Most retail brokers and Cboe's Options Institute provide comprehensive courses and tools, equipping investors with the knowledge needed to navigate the complexities of options trading effectively. Remember, responsible options trading is based on defining an investment objective and using analysis and informed decision-making to determine the most appropriate trading strategy, not emotions. Understanding how options work and the associated risks, just like any other financial asset, is paramount.

Options are a time-tested and highly regulated investment tool that have been traded on registered and regulated exchanges for decades. The increased use of options should be embraced as they offer the potential for targeted investing, passive income, better risk mitigation and income generation. That seems like something every generation can get behind.