Zero Days vs Zero Hours to Expiration
By Ernie Varitimos
March 31, 2022
0:00 / 15:22
Zero Days vs Zero Hours to Expiration

Okay. 3, 2, 1. And we alive. All right. How you doing friends? This is Ernie with the zero days to expiration, although today's episode, which is going to be episode number 88 today's episode is. Not just zero days to expiration, but zero hour to expiration. Now notice, I didn't say hours because there's only one zero hour on the path to expiration when you're talking about this particular strategy and that's the very final hour of the day from 3:00 PM until 4:00 PM.

How is that different than zero days to expiration? As you know, we practice something that we call the inversion of risk. Let's see, we'll turn incoming chat off there. We practice something called inversion of risk. And what that means is that all of our trades are based on an asymmetric principle and we want that asymmetry.

To be in our favor. In other words, we want the risk to be very small and the reward or potential reward to be very large. This is very important and the bigger that we can make that ratio the better. Now, of course, when we have a whole day to do it, we're trying to get in and out in as little time spent in the market as possible.

With as much potential profit and also the rate at which profit grows, we would like that to be as big as possible too. And we have ways that we can do that and we use various tools to help us position ourselves the right way. Or put ourselves in the path of the greatest probability of profit while trying to get the best rate of return or return on risk.

Now, all of that kind of comes together. We use volume profile as our way to analyze the market stress. The market structure is extremely important to us because that gives us where support and resistance lie, where the opportunities are. And also it provides us a way of creating scenarios of where we think price is going to go for the day.

Now, of course, you cannot have a market structure and create scenarios. At least some understanding of the energies that are coming into the market. What is behind price? Is it pushing it in a certain direction? Is it pushing it bullish bearish or is there something where it's range bound? We want to know all those things, because once we've applied that, then we can use our market structure analysis to figure out yeah.

Two scenarios where prices likely to go from there. We can then model that idea using options. And our favorite go-to option is, or option strategy is the butterfly with the butterfly. We can create the kind of profit curve that has the kind of characteristics during its growth that we like the mat the best.

So it is. Directional strategy, excuse me. It is a directional strategy. However, we can't rely on price, always going in our direction. So we're using another concept that we call probability of touch. And that gives us an edge on how we place our strategy, because we're not really. Banking on us getting right in the middle of that profit tent so that we can pin the tail on the donkey.

We'd love that, but that only happens about 10 or 15% of the time. We have to be a little bit more open to different things happening. So if we can make money profit by just being in the right place at the right time. Using this probability of touch concept, then that's good. And that often results in our bread and butter trade where we can return anywhere from a hundred to 250% on our risk.

Occasionally we get. Full co-operative action from the market. It does exactly what we want it to do. And we end up in the prophet tent and sometimes right at the short strikes of the butterfly, which can sometimes return us as much as 800, a thousand, even 1500% return on our risk. And like I said, that's a minority of the times that it happens, but it's okay.