0DTE Options Trading - The Expected Move

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Welcome to our video where we explore the calculation and application of expected range in 0DTE (Zero Days to Expiration) options trading. Discover how understanding the expected range can inform your trading decisions and help you effectively manage risk.

In this video, we dive into the concept of expected range—the projected movement of an underlying asset within a specific time frame. When trading 0DTE options, time is limited, making the expected range a crucial tool for setting profit targets and managing risk.

We discuss three methods for calculating the expected move: utilizing the VIX (Volatility Index), applying the Black-Scholes options pricing model, and using ATM (At-The-Money) straddle prices.

The VIX method, known as the rule of 16, involves dividing the current VIX reading by 16 (or 15.87 for greater precision) to determine the 1-day expected move for the SPX. For example, a VIX reading of 22 corresponds to a 1.38% expected move.

Using the options pricing model, we demonstrate how to calculate the expected move based on the SPX price and implied volatility. For instance, assuming an SPX price of $4000 and 20% implied volatility, the expected move would be approximately ±$48 or 1.20% from $4000.

Additionally, we explore the use of ATM straddles to estimate the expected move. By taking 85% of the value of the 0DTE ATM straddle, we can gauge the probability of the SPX moving ±1.20% within a single trading session.

We discuss the significance of aligning the expected move with your trading strategy. When the price exceeds or reaches the 1-day expected move, it may indicate potential reversals, prompting profit-taking or counter-trend plays. Strategies such as credit spreads, iron condors, and long butterfly spreads can be tailored based on the expected range.
Remember that the expected move provides an estimate and does not guarantee the actual movement of the underlying asset. Market outcomes may differ from what is implied.

Join us in this informative video to gain insights into the power of expected range in 0DTE options trading. Make informed trading decisions and effectively navigate the market.

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