How to Screen for 0DTE Covered Calls

Jesse Anderson

Covered calls may be one of the most common options strategies, but there’s more to them than meets the eye. While most investors pair monthly covered calls with a long stock portfolio, shorter-term options offer the opportunity to generate even more income.

For example, rather than writing monthly call options for a once-a-month premium, you might wonder whether writing short-term daily options, known as 0DTE covered calls, might produce more income since you’re collecting premiums every day.

In this article, we’ll discuss what 0DTE covered calls are, the economics behind them, and how you can screen for 0DTE covered call opportunities.

Let’s dive in.

What Are 0DTE Covered Calls?

Covered calls involve writing (selling) call options against a long stock position. In effect, you’re providing the option buyer with the right to purchase the stock you own at a predetermined price any time before the expiration date. And in exchange, you get to keep the option premium as extra income above and beyond any dividends.

The term 0DTE stands for “zero days ’till expiration,” meaning these options are set to expire at the end of the current trading day. So, in other words, the option buyer must either exercise their right to acquire your stock or let the option expire worthless in just a few hours. It’s a high-stakes gamble for both parties involved in the transaction!

Despite their risk, 0DTE covered calls have become more popular in recent years. The ProShares S&P 500 High Income ETF (ISPY) uses the strategy to generate double-digit yields. (Although mechanically, the fund obtains exposure to the short component of the index through swap agreements rather than writing the covered calls.)

Understanding 0DTE Economics

Covered calls take an existing long stock position and add a positive theta (time value) component that increases your probability of profit. With a 0DTE covered call, you have the same delta (change in the option’s price resulting from a change in the price of the underlying security) without the theta component – so you’re collecting much less.

But the million-dollar question is: How does writing, say, 45 0DTE covered calls compare to writing just one 45DTE covered call?

The net debit of these positions is the same, so 0DTE covered calls will generate a lot more premium income. However, the maximum profit is significantly less since you’ll have to sell options closer to the strike price, which limits your upside potential.

TastyTrades back-tested hundreds of SPY 0DTE versus 45DTE covered calls and arrived at several conclusions in moderate market scenarios (a +/- 1% move):

  • On positive days, the 0DTE covered calls made between 20% and 100% more money than the 45DTE covered calls.
  • On unchanged days, 0DTE options also made significantly more, although the absolute amount was much lower.
  • On down days, 0DTE options lost 25% more than 45DTE covered calls. 

The problems began to surface if there was a large (+/- 2%) move higher or lower. On large up days, 45DTE covered calls outperformed by 40% because they were further out of the money. But worse, on large down days, the 0DTE covered calls had almost no buffer, exposing the covered call holder to all the downsides.

So, the key takeaway is that 0DTE covered calls work best if you have a moderately bullish outlook. But be careful: You could be picking up pennies in front of a steam roller!

Screening for 0DTE Covered Calls

Most covered call investors look at a combination of option income and long stock risks when evaluating positions. But with 0DTE calls, there’s a much greater emphasis on making sure there’s no large downside risk. And that can be a little tricky when you’re looking at risks taking place over a single trading session.

Let’s take a look at two types of 0DTE covered call traders:

If you trade large indexes, like the S&P 500 or Russell 2000, you might hold a long position in the index and then write 0DTE covered calls daily. In this scenario, you may want to look for macroeconomic risks that could swing the broad market by more than 1% in either direction, such as a Federal Reserve interest rate decision.

On the other hand, some traders choose to purchase individual stocks, write a 0DTE call option, and close the position within one or two trading sessions. In that case, you may want to ensure the companies don’t have any upcoming earnings or other events that could spur volatility, and potentially be comfortable holding the stock long-term.

0DTE Covered Calls
optionDash makes it easier than ever to screen for opportunities, including 0DTE covered calls, while accessing the information you need to make informed decisions. Source: optionDash

Covered call screeners like optionDash make it easy to screen for 0DTE options. After selecting an expiration that’s the same day, you see a list of call options along with their annualized return, downside protection, upcoming earnings dates, and other pertinent information that you can use to decide if it’s worth the risk.

You can also research indexes or individual stocks to see their entire option chain and see if there are any preferable strike prices if you go further than one strike out.

Alternative to 0DTE Options

0DTE covered calls aren’t the only way to level up your covered call strategies – there’s an entire spectrum between writing monthly and 0DTE covered calls.

For example, weekly covered calls are short-term options contracts that expire in just a week. By selling these covered calls, you can collect more frequent premiums while having more theta (time value) than 0DTE covered calls. You can also build in a little more downside protection and room for upside appreciation than shorter-term positions.

If you’re looking for a more hands-off option, the ProShares S&P 500 High Income ETF (ISPY) may be a viable alternative with its 11.32% annualized distribution yield, as of February 2024. That said, while it offers a done-for-you strategy, the fund provides less flexibility and involves paying a 0.55% expense ratio.

The Bottom Line

0DTE covered calls have become an increasingly popular way to generate more income. But the extra income comes with some important risks. While daily calls have less time for the stock to move and be called away, there’s a strict limit on upside exposure and you have much less of a downside buffer. So, it’s best in more neutral market conditions.

If you’re interested in covered calls, optionDash can help you screen for the best income-producing covered call trades, including 0DTE covered calls. On the other hand, if you’re new to covered calls, Snider Advisors offers educational e-courses that bring you from a covered call novice to an expert trader using battle-tested, done-for-you strategies.

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