Earlier this week, I re-read the paper Retail Traders Love 0DTE Options... But Should They?, which essentially said the same thing everyone else does: they buy lottery tickets and lose.
Now, that paper is about 3 years old by at this point, and since then, there are a lot more 0-DTE traders. So, if it’s true that it’s all just net-negative gambling, then why would people keep trading them in increasingly large numbers?
That didn’t make much sense to me, so I wanted to take a look on my own to find a more recent and nuanced picture.
Specifically, I wanted to find out how much spread sellers were making, as pretty much everyone who’s serious about this knows that’s where the +EV is.
After pulling about 2.7 million trades over the last month, we were able to re-construct almost the exact option positions taken by small traders and derive how much they made per day.
As you’ll see shortly, people are trading these more and more for a reason, and they aren’t as dumb as you’d think.
So with that covered, let’s get into the numbers.
How we even know what they’re doing
Thankfully, the paper shared the methodology they used for being able to derive positions from trade data, so we simply borrowed some chunks of it.
To keep things simple, we’ll just walk you through what we did:
Pull every trade on every SPXW contract expiring that day from Massive.
Condition codes come with every trade, but we only needed two: SLAN (single-leg auction) and MLAT (multi-leg auction)
Match each trade to the last quote before it
A trade above the midpoint is a buy, below is a sell
Group MLAT legs that hit the same exchange within a millisecond of each other, then find the mix of known structures (e.g., verticals, iron condors, butterflies, straddles) that fit the trade.
Mark everything to the 4pm settlement
Now, while this approach works for identifying the opening trades, it’s still difficult to identify whether or not just someone opened the position and closed it 5 minutes later.
So this builds on the assumption that trades are held to close, which we know isn’t always the case.
Nevertheless, we’re focused on spread sellers, where the highest EV trade is usually holding to close anyway, so it’s a good enough starting point.
The sellers are WINNING
We expected the first data pass to take more interpretation, but right off the bat, the results were extremely clear: