A “Masters” Approach to Short-Dated Options
Well, November’s finally coming to an end. Election Day is far in the rearview, the market has weathered a storm of news, earnings reports, and economic data, and we’ve still got Thanksgiving to look forward to.
It’s been eventful, that’s for sure!
Now, in earlier issues, I’ve mentioned that we’ve entered a six-month seasonal sweet spot for market performance, and we can expect the strength of the tailwinds to pick up as we race towards the end of the year. It’s a good time to adjust your long-term portfolio to take advantage of the positive seasonality – but there’s plenty of short-term opportunities you won’t want to miss out on.
Last week, we discussed how short-term options have exploded in popularity over the last few years and how these contracts can be used to hedge against moments of high volatility or low market breadth.
But these options aren’t just being used to hedge…
Zero-days-to-expiration (0DTE) options contracts, the latest, hottest batch of assets on the market, are a prime example of that. Trading volume on these ultra short-term contracts has surged upward over the last two years:
There’s about $1 trillion in daily trading volume moving in these options, according to JPMorgan Chase – which is a good sign there’s money to be made. But trading options can be risky even when dealing with longer-dated contracts… and wandering into zero-day options trading without a guide could lead to disastrous results if you aren’t careful. Thankfully, I know an expert – and he’s willing and eager to teach.
I’ve interviewed our corporate partner Jonathan Rose before; the mind behind Masters in Trading is dedicated to helping traders grow and succeed in increasingly volatile markets, offering up educational lessons, live trade ideas, and market commentary every morning.
Jonathan spent 25 years learning on the Chicago trading floors and inside private investment firms, and he’s used that experience to develop several strategies and tools to read market volatility structures to find winning trades. And now he’s turning his attention to the short-term options market.
Just this morning, Jonathan held the One-Day Winners Summit – a live event where he revealed his five-step strategy for making successful 0DTE options trades, and where he debuted his latest tool to find and track the most promising short-term options plays on the market.
It’s exciting stuff – and as a fan of Jonathan’s, I had to bring him back for another interview to discuss his latest insights.
Take a look below…
An Interview with Jonathan Rose, from Masters in Trading
Mike Burnick:Welcome back, Jonathan. I’m glad you could join me today.
Jonathan Rose:Excited to be here, Mike. Thanks for having me!
Mike:I’m excited too – because we’re here to talk abouta relatively new trading product that’s really justtaken Wall Street by storm, and really captured the attention of retailtraders especially.
And that’s, of course, those ultra short-term option contracts with zero days to expiration, otherwise known as “0DTE” options. Just two years after they launched for retail use, they’ve skyrocketed in popularity – to about $1 trillion a day in trading volume.
Now, Jonathan, I know you’ve taken an interest in these lately. Can you tell us a little bit more about this interesting new market and how you participate in it?
Jonathan: Sure. So… I guess we can start with some context. The options market as a whole started in the late ‘70s, early ‘80s or so. And they saw just asymmetrical growth compared to the stock market. The first movers into the options market did really well.
Well, what’s been happening since? There’s been a shift towards shorter-term options over the years – that really got moving in 2016 and 2017.
That started with the weekly options products, but I guess through COVID and maybe through retail demand, it wasn’t enough. So, more products kept coming. The shortest-term options available went from one week to three days to two days to… well, now you can trade options that expire the very same day.
Mike: All to keep up with demand, then.
Jonathan: Right. And it’s interesting when people talk about these 0DTE options, these zero-days-to-expiration options – people treat them like they’re this huge new thing, but they’re really not that different from an option with a week, a month, three months, or six months of time until expiration. Or even LEAPS or the warrants that are five-year options.
Options are options.
The only difference between a one-day expiration option and a warrant is five years of time value. It’s just time… it’s just a lot of time!
Mike: Right, and there’s a lot less time to work with in the case of these short-term contracts.
Jonathan: Absolutely. Absolutely.
Mike: So, in that case, tell us a little bit about how you do this trading?
I mean, I’ve talked to you before Jonathan. I know you could approach this basically as a series of non-directional trades. But then again, you know, maybe you’re looking for certain market moves to go on – like the recent presidential election results, or maybe it’s a Fed meeting. And you can profit off the strategy with both puts and calls as well, correct?
Jonathan:That’s right.
So really, there’s two ways you can play the market with these options, in a general sense. Sure, you can bet on direction, like whether the market’s going to go up or down. But you could also just bet on the movement period, whether we’re about to see more volatility in the market.
A lot of people follow the VIX – that’s the CBOE Volatility Index, the “Fear Index.” So, what we’re doing, if we’re trading both sides of the market, maybe we’re looking at a period of quiet volatility.
Maybe it’s Thursday, and we’re headed into a very, very big unemployment report. But for whatever reason, the volatility is low going into it. That might present a good trade, because once that Friday unemployment report hits the news, there’s an expectation of movement.
There are very few times that you know the market’s gonna to move. On any given day, the market doesn’t really have to move, after all. But non-farm payroll numbers, going into a big election, important CPI numbers coming… the markets gonna move those times. Volatility’s likely to increase, and so you can profit from that.
Mike:I get it. It’s interesting.
Now, the big allure for these zero-day or short-term options is that you can buy them for just pennies on the dollar… and then they can really explode higher if you get that market catalyst that you’re talking about. Which is probably why they’re so popular – it’s easy to gamble with them.
But what do you look for in a trade setup?
I know that you work closely with the “VIX term structure,” which is fascinating. You just mentioned volatility as a factor in these trades, maybe you could explain a little bit more about what you’re looking for there?
Jonathan:Sure!
So, I look at short-term options. And there are really two benefits there: The first is what’s sexy – that you can make a bunch of money, you can get high returns from a really small investment.
That’s obviously very risky.
I think the bigger benefit is that… most of us, I would say a high percentage of people anyway, are long the market in our long-term portfolios. You pretty much end up being long by default, usually on the “Magnificent Seven” stocks because they end up dominating the market.
These short-term options, then… if you’re concerned with an increase in volatility, or if you’re concerned with an increase of risk, or maybe if you’re just too long in your portfolio and you’re concerned that, hey, we’re walking into a big economic number release or a critical earnings season, you can use these options when you want to start giving yourself downside protection.
I look at these contracts as a great way to buy insurance when you need it. And there are plenty of times where you might be long, but sometimes you’re a little over-invested, or it’s going well and you’re thinking about locking in profits.
This is great for those moments – because you can protect yourself with short-term options, and then if the market does pull back, you can make some money so you can get back into your favorite holdings.
Mike: There you go.
And Jonathan, I know you’ve researched the different patterns in the VIX term structure – you mentioned that in our last interview. And you know, it’s really fascinating what it can tell you about what to expect from the market next.
I think you put together a tool that’s on the Masters in Trading website for that – kind of a calendar-type tool that can show folks how market volatility changes day to day, right?
Jonathan:Right! I didn’t get to that part of your question – my apologies.
So, the way that we look at the market, which might be a little bit different than folks are used to, is that there’s the VIX, the “Fear Index.” That’s a 30-day measure of market volatility.
When we talk about “VIX term structure,” that’s all about reading volatility. There’s a one-day VIX now that you can read through. There’s a nine-day VIX. A 23-day VIX, the 30-day, a 37-day, and a 90-day.
We want to look at the relationships between those different time factors in the VIX.
Before the 30-day VIX spikes, you’re going to feel those incoming tremors in the one-day VIX, and in the nine-day, and in the 23-day. And you can react ahead of time if you can follow the moves.
That’s what our tool does. It just simplifies how traders can follow VIX’s term structure. As opposed to what many people do, which is just follow the default 30-day VIX. When that starts going higher, they realize that risk is on, so they might get concerned about their portfolio or look for ways to protect against the short-term movement. But they don’t have the advance notice we do.
Mike: Ah, I see… So, it’s kind of like Baskin Robbins, right? 63 different flavors of VIX out there, and you track every single one.
Jonathan: Ha! Well, it’s honestly a little bit more analogous to the yield curve, or potentially a commodity like oil that you can trade oil three years out. But there’s definitely some overlap with the number of VIX timeframe options and the 31 flavors.
Mike: That’s interesting stuff. And of course, you did a beta test on the short-dated options strategy before launching it. Recommending, you know, the zero-dated options trades to some of your original members who were open to beta testing.
The results have been very impressive. I’ve seen, you know, 142% gains in 24 hours, and one guy in the test I saw, he actually earned over $1,000 in a single day.
What types of underlying securities do you typically take these trades on?
Jonathan: Starting out… the QQQs are the big one, mostly, just to follow the Nasdaq. You can trade the SPX to follow the S&P 500, as well.
You know, on that topic, the Chicago Board Options Exchange came out with a really cool product recently. It’s called the XSP: it’s like a mini-index, it’s one-tenth the size of the SPX and it’s got a whole bunch of volatility.
I’m always recommending people paper trade. But for those who always say, “I can’t paper trade, I need skin in the game,” which is kind of silly, that’s all in somebody’s head… for that person, the XSP is a great little playground – because you can play with a couple hundred bucks, you can follow the market, and it’s one-tenth the size of the SPX.
So, you can prove you can make some money doing that before you hop into the big game, but it’s a great way just to build your memory bank, as we like to say.
Mike: Right. Before you move into the big leagues trading the SPX, you can try out the mini size and cut your teeth. That’s interesting, I’ll have to check it out.
So, while we’re still talking about these zero-day options – as you pointed out, they can obviously be useful as a directional trade, but they can also be useful as a hedge for your portfolio, correct?
How would you go about hedging your portfolio with these instruments?
Jonathan: It’s really simple, actually. I mean it, you can just go in there and buy short-term puts.
And the great thing about these short-dated options is you can never risk more than you decide to invest or bet in the market. And so that’s something that… personally, I’m not a big fan of risking $1,000 to make $20. But I’m a big, big fan of taking lots of little shots with small risk that can potentially win big.
So, if somebody is concerned and wants to hedge their portfolio with these options, you just have to figure out the timeframe. How long do you want to hedge for? A month? A week? Just three days? Is there a big economic report or a big earnings release that you’re concerned about?
I mean, we just had NVIDIA earnings. Those were certainly supposed to move the market.
A good strategy might be… if somebody is significantly long NVIDIA and is likely to wake up and be very upset if it is down 10% after a release? Well, if that’s you, you might want to spend $300, $500, even $1000 to buy some insurance – so you’re not that upset if NVIDIA goes down. So, you’re a buyer profiting off the drop, rather than somebody who’s just walking around with their head down.
Mike: Yeah, that’s a great point. Talk about market-moving catalysts. The NVIDIA earnings reports are always very widely watched.
Well, I’ll tell you, this is all such fascinating stuff.
Obviously, these new types of options, you know, are pretty controversial, but some traders like your own beta testers, Jonathan, they’re making really, really good money in a short period of time. Of course, there’s always risks too, right?
Jonathan: That’s right – there’s always risk with options. And especially… we look to buy options, which have a capped risk. But you could still lose everything you put into the trade.
But I think what the folks who we’re working with have realized is that we teach how to trade options, first and foremost. And there’s really no difference – I said that when we first started, there’s no difference – between an option with a day until expiration, or a week, or six months. It’s just time.
And so, we really teach how to trade options and how to understand that risk. And what this allows people to do is… If you’re bullish, if you think something’s happening real quick, you have something to do where you can go and try and trade the situation without risking huge amounts – since you don’t necessarily need that extended time value. Because paying for that extra time costs a bunch of money.
Mike: Yeah, absolutely. You can look at the options chain – those long-dated contracts can get expensive, and fast.
Now, Jonathan, speaking of teaching and learning… you have a thriving online community that follows your every move – on these options, and on the rest of your trades. Can you tell us a little bit more about your Masters in Trading community?
Jonathan: Thank you for asking!
So, having a community… well, trading is emotional. You know this.
So, one thing we do in our community, is we have a culture where people are supportive and friendly, it’s a coffee shop kind of environment. You log in first thing in the morning, everybody is saying “GM, GM.” Everyone’s saying good morning and saying hi when they get in there.
The real value I feel with the community is, before you do anything, you can put it out there. People chatting aren’t giving advice, of course – I’m certainly not in there giving any advice either, for obvious reasons. But you can reach out and talk, and you’re going to find people from common walks of life that have the same considerations, that you can talk to and get a good perspective from.
I’m a big believer that most people… most people that I’ve worked with throughout the years at least, they trade too much, they trade too big. Talking to others can give you a good perspective to avoid that.
Mike: That sounds great. Really grounding.
Jonathan: Exactly. It’s nice.
Now, sometimes the folks in there do hang on to my every word a little too much…
Mike: Ha!
Jonathan: Right. Sometimes I’ll just want to review the market and say, “Oh, we could potentially see a nice strong move here,” without everybody jumping in the market right away.
We want to do that, in general – it’s all about being patient. You want to act more like a hunter, waiting in the trees for these big market moves to turn up.
But at the end of the day, it’s nice. And I think those who share in the community, and who get engaged with everyone, see a lot of benefit by getting some feedback and having a sense of community.
One other thing, on that note: We don’t really let anybody be a downer in there or a big poo-poo when others talk about their ideas and thoughts. Nobody wants to walk into a community and everybody’s complaining. We keep the vibe upbeat. People are asking great questions, and folks can disagree, but we’re all there to support one another.
Mike: Yeah. The stock market is hard enough, so you’ve got to keep things positive. I totally agree.
Jonathan: There’s a practical reason as well: if we’re talking about an open position in our portfolio, and somebody gets down about an open position, somebody else might read that and then they think they’re wrong for taking the trade. And it’s a really difficult situation.
Because if you buy a stock at $100, and it goes to $99, that doesn’t mean you’re wrong.
The market just moved to $99. And some people will look at that as an opportunity – your stock’s on sale! And others may look at that and think, “Oh no, here I go again.”
So, we try to avoid that side of things – and we really press the idea that we make our decisions before we get in the market, and then accept that the market’s gonna do what the market’s gonna do once we’re in it. We can’t control more than that.
Mike: Yeah, that’s so true. I can tell you from 40 years of experience in this market… if your stock goes down by $1 that doesn’t make you a bad person or a fool. It’s just the market.
Jonathan: Exactly. As we’ve learned throughout the years, the market’s not always right. It’s just not: there are nonsensical moves that happen all the time. It takes a little bit of time to time to learn, but a community certainly helps that message sink in.
Mike: Yeah, it sure does. That’s great stuff, Jonathan.
I think we can wrap it up there, and let you get back to your press tour! I appreciate you joining me for another interview today. Here’s to your beta testers and your new traders making even more money in a short period of time.
Thanks again for catching up with me about your latest strategy, Jonathan. I really like the idea of leveraging these 0DTE options, and your VIX-based strategy is always great to learn about.
Jonathan: It was a lot of fun! Thank you so much for having me. Great talking to you, Mike.
Mike here.
I’m a big fan of Jonathan’s work: I try to tune in to his morning streams whenever I can. And his short-term options strategy is a great way to play the market in any environment – one I’m excited to learn more about myself, and one I’m excited to share with the TradeSmith audience.
Whether you’re looking to build profits in the short-term or trying to hedge against risks to your long-term portfolio, learning to read the VIX term structure and taking advantage of these ultra short-term options can add a powerful strategy to your trading toolbelt.
Jonathan held his debut event for this Zero-Day Options strategy earlier today – but don’t worry if you didn’t get a chance to catch the One-Day Winners Summit live. Jonathan’s big on recording his educational sessions.
If you’d like to find out more about how short-dated options can deliver big profits in little time – and how you can benefit from Jonathan’s latest tools and his supportive community – you can CLICK HERE to watch a replay of today’s event.
The TradeSmith offices will be closed this Thursday and Friday for the Thanksgiving holiday – so we’ll be skipping our usual Thursday issue. But we’ll be back to business as usual come Monday… and you’ll hear from me again on Tuesday.
Good investing – and happy Thanksgiving to all those who celebrate!
Mike Burnick
Senior Analyst, TradeSmith