0 DTE SPX Gap Hunter Strategy Guide for Gap Up or Down Markets

For a long time, I avoided 0DTE (same-day expiration) SPX credit spreads, viewing them as high-risk, almost like gambling.

The stock market’s volatility within a single day can be unpredictable, and a sudden strong move up or down often results in trades quickly going in the money.

However, after observing the market’s behavior for years, I’ve developed a refined approach to 0DTE trades, only executing them under very specific conditions that can provide a greater margin of safety. Here’s how I approach 0DTE SPX credit spreads when the market is trending strongly in one direction.

Why Entering into 0DTE Options Without a Concrete Strategy is Risky

Trading 0DTE without a well-thought-out strategy can expose traders to significant risks due to the unique characteristics of these positions.

In my view, the primary risks associated with 0DTE options include:

• High Volatility: 0DTE options exhibit extreme price sensitivity due to gamma risk, with no time buffer for recovery.
• Emotional Toll and Overtrading Risk: The rapid, high-stakes nature of 0DTE trading can lead to considerable emotional stress and increase the likelihood of overtrading or poor decision making.

Due to the elevated gamma risk, a 0DTE position tends to oscillate rapidly between being profitable and incurring losses from one moment to the next.

However, after years of watching these trends, I found that certain conditions can provide opportunities to better manage that risk.

You can view the performance of this strategy on my Strategy Tester page.

Condition 1: Strong Market Trend (Gap Up or Down)

The first condition I look when employing this strategy, aptly named "gap hunter," is a strong directional shift in the market. To maintain objectivity, I would need to see a change greater than 1% before considering this strategy.

If the market gaps up or down significantly at the open, it often indicates a strong trend for the day. This provides an additional layer of safety because:

1. Implied Volatility Spike: When the market moves sharply, implied volatility tends to rise. This creates an opportunity to sell options further out of the money, as the premiums are higher.

2. Wider Strike Selection: Elevated volatility allows me to select strikes that are more conservative and further away from the current price. This means I can still capture decent premiums while giving myself a comfortable buffer before the short strike is breached.

For instance, if the market is trending down significantly, I would look to sell a bull put credit spread. If the market is trending up, I’d focus on a bear call spread.

Condition 2: Established Resistance or Support by Mid-Day

Another critical observation I've made is that by mid-day, the market typically forms clear support or resistance levels.

This means that after the initial surge in one direction, it becomes harder for the market to break through certain price points, especially when a strong trend is in place.

By this time, the market has often already made a significant move, reducing the likelihood of further sharp price changes.

When this pattern appears, it provides an additional signal to enter the trade, knowing that there's a higher chance the market will consolidate rather than continue surging in the same direction.

Here are two charts (one for each market direction) that illustrate what I typically look for in both down trending and up trending markets.

Strategy Execution: Credit Spreads with Delta 0.10

Once both conditions are met (a strong directional move and clear support or resistance), I proceed with selling either a bull put spread (in a downtrend) or a bear call spread (in an uptrend).

My strike selections are based on a 0.10 delta, which offers a solid buffer from the current market price, reducing the risk of the trade going in the money.

I keep my credit spreads at a width of $20, which translates to slightly under $2,000 in capital at risk per trade. 

I personally like to cap my risk at 5% of my portfolio or less. For those with smaller or larger portfolios, you can scale the width of your credit spreads accordingly. 

Taking Profits Automatically: Good-Til-Cancelled Order

To simplify the process, I place a Good-Til-Cancelled (GTC) order to close the trade by buying back the spread at 30% of the total premium.

This allows me to lock in profits at the earliest opportunity during a slight market reversal, without needing to monitor the market continuously throughout the day.