What Are Daily (0DTE) Covered Calls?

0DTE (Zero Days to Expiry) covered calls involve selling (or “writing”) call options on an underlying security you own, set to expire on the same day. This strategy is designed for investors seeking to generate steady premium income while participating in the capital growth of the underlying asset. The “out of the money” aspect means the strike price of the call option is above the current trading price of the security, offering a balance between earning premiums and maintaining potential upside.

Why Choose 0DTE Covered Calls?

Investors are drawn to 0DTE covered calls for several compelling reasons:

• Steady Premium Income: By selling covered calls that expire daily, investors can potentially earn premium income more frequently, which can accumulate significantly over time.
• Capital Growth Participation: Since the calls are sold out of the money, there is room for the underlying security to appreciate in value, allowing investors to benefit from capital gains up to the strike price.
• Risk Management: This strategy provides a degree of downside protection. The premium earned can offset potential losses in the underlying asset, though it does not provide full downside risk coverage.
• Dynamic Strike Price Advantage: The daily setup of 0DTE covered calls allows investors to choose strike prices that closely align with the current trajectory of the underlying security. This flexibility enables a more tailored approach to optimizing potential profits and managing risks.

Example of a 0DTE Covered Call

Consider an investor holding shares in XYZ Corporation, currently trading at $100. The investor sells a 0DTE call option with a strike price of $102 for a premium of $1 per share.

• If XYZ Corporation’s share price remains below $102 by the end of the trading day, the call option expires worthless, and the investor retains the shares and the $1 per share.
• Should the share price exceed $102, the call may be exercised, and the investor sells the shares at $102. However, they still benefit from the share price appreciation up to the strike price, plus the premium earned.

Risks of 0DTE Covered Calls

While 0DTE covered calls can be lucrative, they also carry inherent risks:

• Capped Gains: If the underlying security’s price skyrockets past the strike price, investors miss out on gains beyond this point, as they are obligated to sell the shares at the strike price.
• Market Volatility: Sudden market movements can make it challenging to predict the appropriate strike price for the call option, potentially leading to missed opportunities or undesired assignments, which occur when the buyer exercises the call option that is then assigned to the seller who has the obligation to deliver the stock at the strike price.
• Operational Demands: Managing daily options requires a significant time commitment and constant market monitoring to make timely decisions.

Conclusion

0DTE covered calls present a unique strategy for investors looking to enhance their income through daily premiums while still participating in the growth of their investments. This approach combines the potential for steady income with the opportunity for capital appreciation, all within a framework that allows for a certain level of risk management. However, success with 0DTE covered calls requires diligence, a deep understanding of market dynamics, and an ability to respond swiftly to market movements. For those who can navigate these challenges, 0DTE covered calls offer a pathway to both growth and income.