The fundamentals of the 0-DTE (Zero Days to Expiration) trading strategy are built around capturing the rapid decay of options premiums on the day of expiration through asymmetric risk-to-reward setups.

Here’s a breakdown of the core elements:

Asymmetric Risk-to-Reward:

• The foundation of the 0-DTE strategy is to place trades with extreme asymmetric risk-to-reward ratios. The most common approach is using Out-of-the-Money (OTM) butterfly spreads. These are constructed to limit potential losses while maximizing potential rewards. The debit is kept low, usually under 10% of the width of the butterfly.

Trend Following:

• Trades are aligned with the current market trend to increase the likelihood of capturing larger moves in the direction of that trend. Market direction is typically determined using moving averages and other technical indicators.

Options Premium Collection:

• The strategy focuses on the rapid decay of options premiums on the expiration day (0-DTE). This decay provides an opportunity to collect options premiums efficiently, especially in highly asymmetric setups.

Agile Continuous Improvement Process:

• There is a strong emphasis on regularly reviewing and adjustingstrategies based on performance data. This agile approach allows forcontinuous refinement and adaptation, crucial for maintaining atrading edge in ever-changing market conditions.

Market Structure Analysis:

• Volume Profile analysis is utilized to understand the market structure and anticipate potential price behaviors. Key elements include identifying High Volume Nodes (HVNs) and Low Volume Nodes (LVNs) to mark areas of potential support and resistance, which are crucial decision points.

Profit and Risk Management Framework:

• The strategy focuses on monitoring the highest profit achieved and making dynamic “hold or fold” decisions throughout the trading day. As the end of the trading day nears, gamma risk increases, requiring a tighter risk management approach. Scenarios are built for favorable and unfavorable price movements, allowing premeditated decisionmaking.

Strategy Variations:

The 0-DTE strategy is not limited to a single approach; it includes several variations to adapt to different market conditions:

• OTM Butterfly: A basic long butterfly in the direction of the trend.
• Batman Strategy: This strategy consists of two long OTM positions, effectively creating a “winged” set up to capitalize on large moves in either direction.
• Time Warp Strategy: Involves placing both a put fly below the market and a call fly above when trends are unclear or extreme/low volatility is expected. This trade can go out to 1, 2, or 3 days to expiration to capture overnight moves.

Volatility Regime Consideration:

The strategy dynamically adjusts trade types and widths based on the current VIX level. For example:

• Low VIX (<17): More 1, 2, and 3-DTE trades.
• Moderate VIX (20-23): Mix of 0, 1, and 2-DTE trades.
• High VIX (25+): Primarily 0-DTE trades.

Mental Toughness and Discipline:

• A key component of success with the 0-DTE strategy is the mental aspect. Traders are encouraged to develop mental toughness and discipline, as no strategy or edge can be effectively executed without it. This includes sticking to the plan, executing under pressure, and continuously learning from mistakes.

Incorporation of Eastern Philosophies:

• The strategy’s philosophy also incorporates Zen principles such as impermanence and the balance of yin and yang (soft skills like strategy and analysis vs. hard skills like mental toughness and discipline). This holistic approach helps traders maintain a balanced and focused mindset, which is crucial for navigating the uncertainties of trading.

These fundamentals combine to create a robust, adaptable trading strategy designed to thrive in various market environments while maintaining a strong focus on risk management and continuous improvement.