Zero Day to Expiry Options

A.K.A. 0dte Options

What are Zero Day to Expiry Options?

Zero Day To Expiry (ZDTEs) options are simply option contracts that expire on the day of purchase. They are typically used by option day traders that aim to profit from extremely short time frame volatility.
Time to expiration is a significant factor in option pricing. This makes ZDTEs a highly effective tool in acquiring extremely high leverage for short term option traders since the cost of premiums is markedly lower than their longer dated counterparts.
ZDTE use option spreads rather than naked options since it caps losses to writes and allows buyers to define maximum payoffs while paying lower premiums.
Option Spread
An option spread is a strategy that involves longing one strike price and shorting a more OTM strike price of the same option type (i.e. long call + short call OR long put + short put).
The buyer pays a premium equal to [Long Strike Premium - Short Strike Premium] which is less expensive than a naked option (which would pay Long Strike Premium).
If the settlement price is greater (for calls, lesser for puts) than the long strike price but lesser (for calls, lesser for puts) than the short strike price, the payoff to buyers is slightly better than a naked option with the same long strike price due to the reduced premium.
If the settlement price is greater (for calls, lesser for puts) than the short strike price, the payoff to buyers is capped at [Short Strike Price - Long Strike Price] (for calls, opposite for puts).
Option spreads give purchasers access to cheaper premiums but a defined max payoff. The decision to make ZDTEs option spreads rather than naked options is because significant volatility is not expected with one day epochs while max payoffs limit writer losses.

ZDTE Writer

ZDTE writers deposit a base asset (e.g. $ETH, $ARB) or $USDC to write calls and puts respectively. Writer liquidity may be utilized between 0-20% OTM which means a strike price does not need to be selected by writers. The strike price that writers are exposed to depends on how liquidity is utilized by option buyers.
If the spot price of $ETH is $1,800, calls may be written from $1,800 to $2,160 (1,800 * 1.2) while puts may be written from $1,440 (1,800 * 0.8) to $1,800.
Writers receive premiums if their liquidity is used to write options.
Writers pay settlement to buyers in the event options expire ITM.
ZDTE design is slightly different to our standard options. Option positions are leveraged based on a Margin Safety Factor (writers earn leveraged premiums but pay leveraged settlement if ITM) but have capped payoffs due to our option spread design.

ZDTE Buyer

ZDTE buyers pay a premium in $USDC to purchase option spreads.
They will select:
  • Long Strike Price: settlement price must be higher (for calls, lower for puts) than this to be ITM
  • Short Strike Price: defines the price at which any additional increases (for calls, decreases for puts) to settlement price will not increase settlement paid
The maximum payoff to the buyer can be defined as [Short Strike Price - Long Strike Price] (for calls, opposite for puts).
ZDTE buyer's maximum loss is equal to the cost of the premium, which is [Long Strike Premium - Short Strike Premium]. An IV Premium is also applied to purchases based on current liquidity utilization rates.
Additional Considerations

Margin Safety Factor

When ZDTEs are purchased, a corresponding amount of liquidity from the ZDTE liquidity pool is locked up based on:
Liquidity Locked = Max Payoff * Margin Safety Factor
Where: Max Payoff = Short Strike Price - Long Strike Price (for calls, opposite for puts) Margin Safety Factor = 300% (variable via governance)
For example, an $ETH call with a long strike of $1,800 and a short strike of $2,100 would have a Max Payoff of $300. With a Margin Safety Factor of 300%, $900 would be locked from the $ETH ZDTE liquidity pool.

IV Premium

An IV multiplier is applied to purchases based on current utilization in a ZDTE liquidity pool based on:
IV Multiplier = 1 + 30% * (Current Utilization)
Where: Current Utilization = Utilized Liquidity/Total Liquidity
For example, if the $ETH ZDTE call pool has 50 $ETH utilized out of a total 100 $ETH deposited, current utilization is 0.5. A user purchasing $ETH ZDTE calls would have an IV multiplier of 1.15 (1 + 30% * 0.5) applied to any premiums paid.