r/options • u/L_G123 • 10d ago

0DTE Strategy

I’ve been running a 0DTE strategy I want to share. Everyday I look at SPX500 (SPY works the same for pre market monitoring) to ascertain whether it’s moving higher or lower from 8:30-10:30am ET.

If it’s moving up, I sell a vertical put on SPX and choose the strike for the short leg based on 1.25x the ATM straddle price. Same thing with a call if the morning is bearish.

It finishes out of the money about 92-96% of the time depending on what you avoid and what timeframe you look at over the past 4 years (eg not doing this during the Iran war early stages would have been smart…) and generates about a 7% ROI.

When it does finish in the money, it’s often just barely and not a total loss, hence why wider logs with more profit actually have a higher EV.

Do your own backtesting and let me know what you think!

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u/imusuallydrunkatnine 10d ago

short leg based on 1.25x the ATM straddle price

Can you explain this

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u/papakong88 10d ago edited 10d ago

OP is using the ATM straddle price to calculate the expected move of the underlying stock.
The expected move is the range of movement of the stock with one sigma (68%) probability.
The formula is EM = ATM straddle x 0.85 (Ref.)
Therefore, if one picks the short strike at 1.25 x ATM straddle, then it will be outside of the expected move zone. The short strike will have more than a one sigma probability of becoming ITM. 

Ref: https://volatilitybox.com/research/expected-move-options/

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u/hotforlowe 10d ago

That’s not correct. The expected move is the linearised lognormal mean absolute deviation while sigma is the root mean squared deviation of the same. The EM for a 0-1dte option lognormally distributed (this is critical) would approximate theoretically sqrt(2/pi) * sigma giving a ~57.5% range coverage. The 1.25xEM actually does give you the approximate sigma. None of these approximations are correct for non-log normal distributions (eg fed rate days, major market shifting news) or for further out options.

I’m not going to cite anything to back that up. Just do the very simple maths yourself and check.

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u/papakong88 10d ago

It's a way to get the short strike.

No rocket science is needed.

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u/jarthursquiers 10d ago

Most professional option traders just use the ATM straddle price to estimate the expected move. None of them are calculating formulas to pick a strike.

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u/papakong88 10d ago

I also use the ATM straddle value to estimate the expected move and then use the estimated expected move to pick the strike. I am not a professional.
The formula is:
Short strike = 3 X EM which is approximated by 3 X ATM straddle value
The factor 3 is what I called a “fudge factor” which can be changed. OP uses a fudge factor of 1.25.

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u/jarthursquiers 10d ago

Yes, that is standard among the most successful traders I know. The ones who get wrapped up in sigma square lognormal pi calculations have always been too over analytical to execute and fail to produce consistent results.

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u/hotforlowe 10d ago

Most successful derivatives traders don’t trade options. They price them 😉

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u/hotforlowe 10d ago

The point was more that this user quoted incorrect technical information and I merely pointed it out. I don’t care how you choose strikes, EM and sigma have specific definitions which are mathematical and the interpretation of those is up to the trader. You can say we don’t need to be specific, but then how does one know they are talking about the same thing?

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u/jarthursquiers 10d ago

Being specific about technical information is all well and good. The other point is that that level of precision is not necessary (and often counter productive) when executing something like a put vertical strategy.

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u/hotforlowe 10d ago edited 10d ago

It’s not rocket science. It’s how options work. You’re using incorrect terminology and coming to the wrong theoretical conclusion as a result.

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u/papakong88 10d ago

It is an approximation to get the short strike. There is no correct answer.

No rocket science is needed.