I made the said observation on last Friday with SPX using slightly OTM Call options. Btw, I was inspired just a few days ago by this thread here to inspect the SPX at all. That day (ie. Friday) was a special one: the day before the govt and the opposition found an agreement re the US debt issue, and this was a good signal for the markets to rise on the next day. The SPX had and has currently an average IV of 11 or so, and rose about "only" 1.5% on Friday, BUT this was enough to make even more than 1600% profit with 0DTE ! Options with DTE > 0 give less profit. I can give proof for this claim, as I have the data, and will compile and post it soon, though from my this posting in the above thread you can see that it's indeed true: watch the Call ChgPct's there for the different DTEs... I've also verifed & confirmed it with simulations using BSM. See also https://www.tastylive.com/concepts-strategies/zero-days-0dte-options-explained Quote: "[...] For example, loading up on out-of-the-money (OTM) calls to try and ride a sharp upside rally in the S&P 500. As most are well aware, that approach can produce outsized gains with minimal capital at risk [...]"
Have you compared expected value? For that you need to make assumptions about distributional properties. That's the only reasonable approach to compare value.
Ticker='$SPX.X' @ TD Ameritrade via API (for comparison see ^SPX @ YahooFinance) These are the data of strike 4260 of the next 14 DTEs as of last Friday at about 15:15:24. As can be seen, it was possible to make more than 1600% profit with the 0DTE, though the other DTEs aren't bad as well (see Chg% below). Code: Ticker='$SPX.X' @ TD Ameritrade via API AsOf=2023-06-02-Fr-151524-EDT US=4288.9000 Chg=67.88(1.61%) K=4260 For performance calcs the "percentChange" of the Premium was used. Calls: SPXW_060223C4260 Fr DTE=0 L=28.80 B=28.90 A=29.30 IV=7.83 BS=2 AS=13 V=23141 OI=4282 Chg=27.12(1618.89%) SPXW_060523C4260 Mo DTE=3 L=31.47 B=32.10 A=33.00 IV=7.56 BS=1 AS=15 V=4505 OI=2442 Chg=27.02(607.19 %) SPXW_060623C4260 Tu DTE=4 L=36.64 B=35.50 A=36.20 IV=8.80 BS=17 AS=15 V=2061 OI=759 Chg=30.41(487.80 %) SPXW_060723C4260 We DTE=5 L=40.00 B=38.60 A=39.30 IV=9.53 BS=16 AS=15 V=1689 OI=2853 Chg=31.50(370.59 %) SPXW_060823C4260 Th DTE=6 L=42.25 B=41.90 A=43.80 IV=10.00 BS=1 AS=1 V=564 OI=308 Chg=31.72(301.14 %) SPXW_060923C4260 Fr DTE=7 L=43.23 B=44.90 A=45.30 IV=10.39 BS=13 AS=15 V=913 OI=1810 Chg=30.26(233.37 %) SPXW_061223C4260 Mo DTE=10 L=47.15 B=48.10 A=48.40 IV=9.87 BS=5 AS=5 V=1393 OI=406 Chg=31.70(205.18 %) SPXW_061323C4260 Tu DTE=11 L=50.54 B=51.40 A=51.90 IV=10.56 BS=5 AS=5 V=541 OI=138 Chg=32.17(175.07 %) SPXW_061423C4260 We DTE=12 L=55.40 B=56.40 A=56.80 IV=11.92 BS=5 AS=5 V=472 OI=101 Chg=32.70(144.05 %) SPXW_061523C4260 Th DTE=13 L=59.88 B=59.80 A=60.30 IV=12.12 BS=5 AS=5 V=427 OI=124 Chg=34.63(137.15 %) SPXW_061623C4260 Fr DTE=14 L=60.00 B=62.00 A=62.40 IV=12.27 BS=5 AS=5 V=505 OI=855 Chg=33.05(122.63 %) And BSM simulations show that the optimal strike for the above 0DTE case would have been around K=4280 giving about 13800% profit !
You completely ignored probabilities. What was the probability of a 68 point move intraday on Friday? Probably around 1:27...the reason why the further out calls' percent premium change is lower is because the probability of such move over their remaining lifetime is much higher and hence the chances of ending in the money is much higher leading to a higher base premium, reflected in the higher time value.
You are justifying why the longer DTEs are more expensive. But the topic was that shorter DTEs are though corectly cheaper, they give a much higher payout. This much looks like a paradoxical situation, IMO.
They generate a higher percent return in case of a large favorable move because the premium base was much lower to start with. It's like a lottery ticket, a few bucks to win a potentially very large payoff at an incredibly tiny probability. The absolute premium change is actually amaller for DTE0 than farther expirations. Not sure what you are confused about.
What IMO is important to learn from this case study is that it very well will repeat in upcoming similar political decision situations, or other events that have such an impact on the market indices... Caveat emptor... Be prepared... You have got the blueprints...
For the sake of completeness: here's also the result of the same above data now for K=4280. It gives 2325% for 0DTE, dunno yet why the above said BSM sim gives a much bigger value for this case. Code: Ticker='$SPX.X' @ TD Ameritrade via API AsOf=2023-06-02-Fr-151524-EDT US=4288.9000 Chg=67.88(1.61%) K=4280 For performance calcs the "percentChange" of the Premium was used. Calls: SPXW_060223C4280 Fr DTE=0 L=9.70 B=9.50 A=9.90 IV=4.77 BS=25 AS=52 V=85795 OI=6059 Chg=9.30 (2325.00%) SPXW_060523C4280 Mo DTE=3 L=16.74 B=17.30 A=17.60 IV=7.09 BS=13 AS=8 V=6955 OI=821 Chg=14.97(843.10 %) SPXW_060623C4280 Tu DTE=4 L=19.97 B=21.60 A=21.90 IV=8.43 BS=14 AS=15 V=1038 OI=498 Chg=17.11(598.13 %) SPXW_060723C4280 We DTE=5 L=23.60 B=25.10 A=25.40 IV=9.23 BS=22 AS=16 V=1863 OI=1880 Chg=19.35(454.90 %) SPXW_060823C4280 Th DTE=6 L=30.00 B=28.70 A=29.10 IV=9.70 BS=7 AS=5 V=1092 OI=864 Chg=24.29(425.60 %) SPXW_060923C4280 Fr DTE=7 L=31.03 B=31.50 A=31.90 IV=10.08 BS=26 AS=20 V=3269 OI=4233 Chg=23.49(311.63 %) SPXW_061223C4280 Mo DTE=10 L=34.65 B=34.80 A=35.10 IV=9.58 BS=8 AS=6 V=688 OI=449 Chg=25.35(272.54 %) SPXW_061323C4280 Tu DTE=11 L=34.75 B=38.40 A=38.70 IV=10.26 BS=8 AS=6 V=65 OI=115 Chg=23.01(196.00 %) SPXW_061423C4280 We DTE=12 L=43.45 B=43.60 A=44.10 IV=11.61 BS=8 AS=6 V=59 OI=90 Chg=27.90(179.42 %) SPXW_061523C4280 Th DTE=13 L=42.98 B=46.90 A=47.30 IV=11.79 BS=7 AS=7 V=83 OI=789 Chg=25.33(143.51 %) SPXW_061623C4280 Fr DTE=14 L=48.70 B=49.10 A=49.50 IV=11.93 BS=7 AS=7 V=515 OI=1275 Chg=29.50(153.65 %)
Nope,Im strictly running pure backtests and for now completely ignoring skew,stickiness,IV,IV%,cones and any other greek voodoo.... FWIW,you appear to approach things in the same framework that I do,and in my case it holds me back..And IMHO,derivative guys tend to needlessly complicate pure directional trades. Dustin has a very good rep,and if you read between the lines you can see how simple he keeps it..Dest gave a clue also.... Directional trading via options is not complicated... Run backtests and see for yourself