Podcast – Episode 58 – The 0 DTE Trade

Podcast Transcript

Hello passive traders and welcome to another episode. I hope everything is going swimmingly with you. I hope your day is fantastic. I hope the weather is wonderful wherever you are. I hope you’ll be able to get out in nature and experience something and I hope the markets are treating you favorably. Today, I want to talk about a particular strategy that has taken the internet by storm. It’s the zero day to expiration trade. Basically what it is, is people are selling options on expiration day and I mean, there are a lot of people talking about this. You go online, in all the forums and the groups and everything, “Oh zero day, zero day, everybody loves it.” I mean, what’s not to love, right? I mean, weeklies are super hot. Everybody loves trading weeklies because hey, if you trade a month option, you might make 10%, but in a week, in only five days, you can make 5%. That’s even more awesome than monthly options, right?

I mean, let’s just get our money quick. Quick money, quick money, easy money, that’s what everybody wants. They want to get rich today. Tomorrow? They want to get rich now. They don’t want to wait a whole month. Geez. Those are for our grandparents. They’re not for us. And I mean, you know how theta works. Hopefully, theta, the decay of the options, well, a year before expiration, there’s very little theta decay. But in the last month of the option’s life, theta decay really, really takes off and the fastest state of decay happens the closer you get to expiration. So theta is faster at the end of the trade, why not just trade the last day? Forget about everything else. Forget about one month expiration, two months expiration. No, let’s just trade on the last day because that way you wake up and you see what the underlying is doing. Is it going up? Is it going down? Is it going sideways? You know what it’s doing. And then all you’ve got to do is put the trade on and then just let it last for a few hours. It’s just like a few hour trade.

I mean, it’s almost a 100% probability of profit. What could go wrong with that, right? I mean, isn’t that awesome? If you could make maybe 1% a day on a trade for just a few hours? Well, when there’s very little risk, there is very little reward. So you do have to settle for very, very small amounts of premium when you do this. But even if you can make, like I said, up 1% in a day, isn’t that worth it? That really reminds me of a story. A couple of years ago, a friend of mine who teaches people how to day trade invited me to a seminar he was doing in Houston and I went to check it out. I thought eventually maybe we’ll do our own seminars or something and I want to see. And so I went there and I started talking to his staff, talking to some of the people who were there, how they liked it and what they were doing, just a bunch of traders getting together.

A lot of them were students so it’s fun interacting with those types of people. Eventually, I did end up talking to a couple of people that actually were members of Option Genius as well. That was fun. But I was talking to one of his coaches, he was the main trader and then he had someone else that was with him that was also doing some of the teaching. But then he had this one other fellow that he introduced as one of their company’s traders. And so, “If anybody has any questions during the break,” you could talk to him. I forgot his name, let’s just call him Steve. Okay. I don’t know, that is not his real name, but let’s just say it’s Steve. So you can say, “If you have any questions in the break you could talk to Steve.” So I was like, “Oh, cool.” So I’m talking and I’m mingling with people and I ending up finding Steve.

So I was like, “Hey Steve, how are you doing? What do you do?” This, that. And he was telling me, “Dah, dah, dah.” And then I told him who I was and he was like, “Oh, okay, okay. You’re not one of the students. You’re actually somebody who was in the business.” And I’m like, “Yeah, I’m in the business.” So then he actually told me what he really did. He was a coach for hire, pretty much, like a mercenary coach. I mean, if you are putting on a seminar or if you are running a coaching program, you hire people like him to be coaches for you. So they’ve been trading for a while, they understand it, but his main job is not to trade, but his job is to coach traders. And so I was like, “Well, that’s pretty cool. I didn’t even know people did that. That’s a new thing for me.” And he was like, “You know what? But I really want to get into having my own membership.”

And I was like, “Okay, that’s cool. If you have a good strategy or a good way to trade, then yeah, people will pay you, they’ll want to get your trades and whatnot.” He goes, “I have it, I have the perfect strategy.” I’m like, “Really?” He goes, “Yeah.” He goes, “Man, this is a can’t miss, 100%, never fails, never loses money strategy.” He goes, “I’ve been doing this for so long and I’ve never lost money.” And I’m like, “Wow, that’s really awesome. You’ve got my attention. How much money you making?” and he goes, “Man, I’m making like 50, 60% a year and I can’t lose and I don’t lose at all.” And I’m like, “Wow. Well, tell me, what are you doing? What is it?” He goes, “I sell spreads on SPX on expiration day.” And I’m like, “Oh, okay. But there’s no money in that. There’s no premium.” He goes, “I sell them for 5 cents.”

And I’m like, “What?” He goes, “Yeah, man. I sell them, but I sell them in bulk. I sell a whole bunch of them and I get 5 cents for each one, which is, in dollar terms, it’s $5.” So he gets $5 for every trade he does, but he’s risking $495 on every trade. So I was like, “Man, that’s a big risk.” He goes, “Yeah, but it’s not a risk because I do my technical analysis and I know exactly what strikes to sell and I know the SPX is not going to hit it and I only have to be in the trade for a few hours and I let them expire so I don’t pay my commissions on the backend and it’s worked out profitably for so long and it just works and it’s awesome.” And he goes, “You know what? I would love to have people do this with me. And so I have an email list. I email my list to the trades and I would really love to set up a membership and be able to people for this.”

And I was like, “Okay, you know what? Send me your track record, send me the trades you’ve done, how long you’ve been doing it, the results. I’ll have to verify it. I’ll have to check it out and make sure it’s all right. And if it’s what you say it is, then yeah, I would like to help you set up your own membership. You set up your own company and I’ll teach you how to do the software stuff and we can help you with marketing and whatever you need.” So he was all excited, he goes, “All right, cool, cool, cool.” And he never sent me the track record, but what he did instead was he put me on his mailing list. So I started getting his trades. So every week or so I would get a new trade and he’d be like, “Oh hey, I’m doing this and this. We’re going to sell this strike and this strike, dah, dah, dah.”

And then the next day, I’d get an email, “Oh yeah, that trade worked great, and dah, dah, dah,” and just good stuff about it. And then week after that, I’d get another trade and another trade and another trade. This went on for a while. And I mean, I myself, I don’t think it’s very impressive to risk $500 to make 500 bucks. And I don’t want to take that kind of risk reward. I don’t think it works out in the long run. The math just doesn’t work out. So I didn’t do any of these trades, especially now without seeing a track record. I’m just not going to do trade for the heck of it, right? So months went by and the trades kept coming and he seemed to be winning. So I was like, “Oh, that’s great for him.”

But to me, $5 doesn’t really get me up in the morning. It’s not worth it. And so eventually there was an email where he’s like, “Oh yeah, we’re going to do this trade,” and then the next day another email came. This one looked a little bit different so I actually opened it and it turned out that he had a loss and he lost about $170. So it was like a $1.70 which turns out to be 170, is how much he lost on that trade per contract. I mean, that wiped out months of successful trades, but he was still confident. He was sure. “It’s not going to happen again. It’s not going to happen. We’ll, we’ll take care of it. It happens. It’s going to happen once in a while,” but he’s going to get it back not to worry. Until it did happen again and he had another loss, and this time he lost 100% or the whole 500 bucks.

So whatever options he had sold, he had sold spreads on SPX, the spreads ended up in the money. He lost 100% of the money he put at risk, which is 495 bucks. This time he said it was an anomaly. “It’s not going to happen again. There’s no way. Math just doesn’t work out that way. There’s no way it’s going to happen again.” But a couple of weeks later there was another loss, and this time his email was a little bit different. He was apologetic, he was sorry for the loss. He wasn’t sure exactly what went wrong, but he was going to go back to the drawing board. He was going to go back, he’s going to take a break. He was going to refine his system. He was going to make sure that when he came back that he would figure out exactly what went wrong with the system and that he was going to fix it and that it wouldn’t happen again. And that was the last I ever heard from Steve, or whatever his name was.

And that is what normally happens with these zero day traders. They do great for a while, for weeks, maybe even months, maybe even a year, but then the market changes and they lose. Maybe just once or twice, but that is enough to wash away all their gains and more. Now, last year, 2019, the market was up almost 30%. that makes almost everybody look like a genius. I mean, if you’re selling puts, boom, you made tons and tons of money last year. If you just bought stocks and held onto them, you made tons and tons of money. If you bought calls, you made a lot of money, right? So if you are a zero day trader and you’re thinking that, “Oh man, I got this full proof strategy, that’s always going to work,” well, the only thing you know is that it works in a very bullish market because not every year are we going to have 30% returns in the stock market. We’re going to have a lot more volatility. It’s going to have lots more fluctuations up and down, right?

And that is when you’re going to find out if your strategy actually works, when you can trade it in all markets, not just in one type of market, because any idiot can make money in a bull market. And that’s what you see online a lot right now, everybody bragging about how much money they made. Well, that’s great. Any idiot can make money in a bull market. When we’re not in a bull market or when we’re in a stable market or a sideways market or an up and down market, that’s when you’re going to find out how good your trading is. So the people that are on the forums right now bragging about how well they’re doing with their zero data exploration traits, I mean, I hope you understand the risk. You’re playing a game that I for one do not have the guts to play because there is nothing there 100%, nothing is full proof, nothing that is without losses. And when the risk reward is that far out of balance, you are asking for trouble. It is exactly like picking up nickels in front of a steamroller.

You know what a steam roller is? It’s like a big, big machine with a big wheel on the front and that’s how they used to make roads and it kind of squishes the tar and cement and everything down. Well, that’s what you’re doing. That thing is coming down the road and there are nickels all over the road and you’re bending over to pick them up. You’re picking one up and then you’re bending over to pick up another one. You’re slowing down to pick it up and that steamroller just coming and coming and coming. I mean, that thing is slow, it might not catch you. You might get 10 nickels, 100 nickels, 200 nickels, 500 nickels, but eventually you’re going to slow down enough where that thing is going to catch. And if that catches you, you’re flat and you’re not coming back from that. So that’s my take on the zero day to expiration trade. If you’re feeling risky, if you’re feeling like you want to gamble, then that’s exactly what it is. But with passive trading, that’s not what we’re trying to do.

We’re not trying to gamble, we’re not trying to risk our money in senseless trades that, on the face of it, yeah, they make sense, but when you actually think about it and you use common sense, they don’t. Because when you can make $5 and lose $500, it doesn’t take a lot of trades or a lot of losses to put you in the poor house. And with a weekly trade, there’s very little that you could do to adjust it because you only have a week. But this is not a weekly trade. This is an hourly trade, so even rolling it forward doesn’t help you. So there’s really nothing you could do, either you’re in and hopefully it works out, or you lose big. That’s it that’s the gamble. You either win a little bit, or you lose really big. And that’s not the game I want to play. So folks, remember trade with the odds in your favor, but use common sense. Peace.