0DTE Options Selling ETFs: Here's What You Need to Know

What is 0DTE?

Most options-selling ETFs, like the covered call ETFs many investors are familiar with, typically engage in selling call options with about one month until expiry.

This strategy involves agreeing to sell the underlying asset at a predetermined price within a specified timeframe. The seller (the ETF in this case) collects a premium for taking on the obligation to sell if the buyer exercises the option.

Now, all else being equal, reducing the time until expiry typically decreases the premium of an option. This is because there's less time for the underlying asset to move significantly, which reduces the probability of the option finishing in the money (ITM) for the buyer.

Consequently, options that are closer to their expiry date generally cost less and offer lower premiums to the sellers because there's a smaller chance of the asset experiencing a price movement large enough to make exercising the option profitable for the buyer. But sellers can make up for it with volume.

0DTE options take this concept to the extreme by selling options that are set to expire on the same day they are sold. For example, if I own 100 shares of the SPDR S&P 500 Index ETF (

) trading at $513 on April 4th, I might sell a 0DTE option like "SPY240404C00514000."

Breaking this down for those new to options: "SPY" is the underlying asset, "240404" indicates the expiry date (year, month, day), "C" denotes a call option, "00514000" represents a strike price of $514.00.

Essentially, I'm agreeing to sell my SPY shares at $514.00 if SPY reaches or exceeds that price by the end of the trading day on April 4th, collecting a premium for this agreement.

If the trade goes as planned and SPY doesn't reach $514.00 by the end of the day, I keep my shares and the premium. I can then repeat this process the next day with a new 0DTE option.

Why sell 0DTE?

Choosing to sell a 0DTE option over a one with, say, a 30–45-DTE comes down to a strategic preference for managing risk and optimizing returns.

When you sell a call with a longer DTE, the premium received is typically higher due to the increased uncertainty over a longer period.

However, this also means your capital is tied up for longer, and you bear a greater risk of the underlying asset moving significantly, which could result in the option being exercised and potential loss of capital gains on the shares.

On the other hand, selling 0DTE options allows for more frequent transactions, offering the potential for daily income through premiums. This approach significantly reduces the time exposure to market volatility for each individual option sold, limiting the period during which significant adverse movements could occur.

As a result, while the premium collected per option may be lower compared to longer DTE options, the ability to transact daily can compound into substantial returns.

Additionally, it provides greater flexibility and control over the underlying assets, allowing for rapid adjustments to the investment strategy in response to market changes.

The current 0DTE ETFs

The landscape of 0DTE ETFs is currently dominated by offerings from Defiance ETFs and Roundhill Investments, each taking a distinct approach to utilizing 0DTE options for income generation.

From Defiance, we have the Defiance Nasdaq 100 Enhanced Options Income ETF (

) and the Defiance S&P 500 Enhanced Options Income ETF (

JEPY

). Unlike what one might expect with options-selling strategies, these ETFs focus on selling cash-secured puts rather than calls.

For instance, QQQY's holdings on April 4th included Treasury bills (used as collateral) and an option labeled "Ndxp Us 04/04/24 P18210."

This notation represents a put option on the Nasdaq 100 Index (NDX) with an expiry of April 4th, 2024, and a strike price of 18,210. Essentially, Defiance is agreeing to buy the index at this price if it falls below this level on the expiry date, receiving a premium for taking on this obligation.
The allure of these ETFs lies in their outsized monthly distributions. JEPY boasts a distribution rate of 37.52%, and QQQY is even higher at 56.94%, attributed to the Nasdaq's strong performance and higher volatility. However, the risk is substantial—if the underlying index falls significantly, the ETF could be obligated to purchase it at the strike price, potentially leading to losses.

On the other hand, Roundhill's offerings—the N-100 0DTE Covered Call Strategy ETF (

) and the S&P 500 0DTE Covered Call Strategy ETF (

XDTE

-0.09%

)—take a different route. These ETFs focus on selling out-of-the-money (OTM) 0DTE calls on the NDX and SPX indexes, respectively.

"XDTE and QDTE employing a daily covered call strategy with 0DTE options can help the funds to capitalize on short-term volatility for regular income from premium collection, enhancing compounding effects," says Dave Mazza, Chief Strategy Officer at Roundhill Investments. "This approach can potentially reduce longer-term risk and optimize returns, particularly with the added benefit of overnight exposure to stock markets."

This strategy involves agreeing to sell the index at a predetermined price above the current level, collecting a premium for the obligation but capping the upside potential. The risk here is more about foregone gains if the index surges beyond the strike price, unlike the direct financial risk associated with cash-secured puts.

While the exact yields for QDTE and XDTE are yet to be determined, they are anticipated to be significant, and particularly attractive due to their provision of weekly distributions.

"Due to the structural mis-pricing in 0DTE options, we expect QDTE and XDTE to offer the potential for higher income than those using longer dated options," Mazza says. "Weekly distributions also offer benefits over monthly distributions by accelerating reinvestment opportunities, improving compounding frequency, and providing investors with more consistent cash flow."

 

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.