Summary:
Position sizing for zero DTE option markets, like SPX, provides retail traders an attractive opportunity to sell premium in a highly liquid space. For longer dated positions, a typical position may range from 3% to 7% of buying power for a 45-day position. In contrast, for zero DTE positions, the risk should be much lower, around 1% to 7% or even 1% to 10% depending on the account size. It is suggested to reduce position size by half or more for zero DTE trades compared to longer dated positions.
Research comparing zero DTE iron flies with 20 and $30 wings to 45-day strangles and iron condors showed that zero DTE trades involve significantly higher risk. The daily P&L change and total P&L at the end of the trade can be substantially higher for zero DTE positions compared to longer dated trades.
In conclusion, it is crucial to adjust position size when trading zero DTE options to manage the higher risk involved. Traders transitioning from longer dated options to zero DTE trades should be mindful of the increased risk and adjust their position sizing accordingly.
Actionable Insights:
- Adjust position sizing for zero DTE trades to mitigate higher risk compared to longer dated options.
- Consider reducing position size by half or more for zero DTE trades.
- Be cautious when transitioning from longer dated options to zero DTE options, as the risk is substantially higher.
- Focus on managing risk and adjusting position sizing according to account size and trading strategy for different option durations.
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