Zero DTE (days to expiration) options trading has become increasingly popular, but it’s crucial not to trade them blindly. In this video, we’ll explore the seven types of Market Breadth days that offer ideal conditions for zero DTE options trades. By understanding the different types of breadth days, you’ll be able to choose the right options strategies and improve your trading outcomes.
What Is Market Breadth?
Market breadth is the number of stocks or industries participating in a rally or sell-off. If most stocks and industries are driving a price move, then it’s strength. If a few stocks drive a price move while most others move in the opposite direction, then it’s weakness.
The following metrics are commonly used to identify and analyze these market signals:
- V Ratio: Volume that flows into the stocks going up compared to those going down.
- Advanced-Decline Line: Compares the number of stocks advancing against those declining.
- Tick: This is the comparison between the stocks that are on an uptick versus those on a downtick.
Together, all these measures create a more precise picture of where the market might head.
The 7 Types of Market Breadth Days
Breath Extreme Day
On these days, the market shows a clear, extreme reading across all indicators. Often occurring with large gaps (gap and go days), you’ll see:
- V Ratio: Extremely positive on bullish days or negative on bearish days.
- Advanced-Decline Line: Pins to positive 2000 (or negative 2000 on a bearish day).
- Tick: Holds above zero for bullish days or below zero for bearish days.
This is a good day for trend trading. It shows the momentum in one direction.
Breath Reversion Day
After the gap down, the internal comes in bearish mode; however, if the Advanced Decline Line does not stay pinned at negative 2000, it means this is a reversion. The market should close the gap or revert to the mean rather than continuing in the initial direction.
Breath Crescendo Day
Subtle and commonplace trend day. This type of day starts off neutral in the breath but builds throughout the day to an extreme by midday.
- V Ratio and Advanced-Decline readings creep up slowly.
- Tick holds above zero all day.
These are good trend-trade conditions; the market is showing increased involvement in the move.
Biased Range Day
On these days, the market shows a bearish breath environment, but the Tick fluctuates between positive and negative, which makes it a choppy day. Expect range-bound market movements with price moving between resistance and support. Key strategy is fade rallies into resistance or support.
Breath Divergence Day
A gap down opens with negative breath, but interestingly enough, the V Ratio and Advanced-Decline Line begin somewhat positive. Such a divergence might suggest that the market is poised to mean-revert, meaning that the gap closes or re-opens to some significant levels like the 2-day VWAP.
Neutral Breath Day
The most common kind of market day has neutral readings for breath, with all the following occurring:
- The Advanced-Decline Line stays within zero.
- V Ratio remains equalized.
- Tick stays near zero.
These days normally experience the market to trade in a well-defined range. They are good for market-neutral strategies as the market tends to square out without having any strong directional movement.
Breath Failure Day
This is a type of day when the market shows initial strength but the breadth fails to confirm that strength. For instance, a gap up may occur, but the Advanced-Decline Line shows weakness or divergence. When this happens, the market is likely to reverse or fail to follow through on the initial move.
Conclusion
To successfully trade zero DTE options, it is very important to identify the different types of market breadth days. Each type gives a unique set of conditions that will inform your strategy. From Breath Extreme days that are ideal for trend trading to Breath Divergence and Neutral days suggesting that the market is consolidating, understanding these patterns can help you make more informed decisions.
By following the insights shared by professional traders like Mike BellaFiori, Seth Faber, and Garrett Dryan, and applying the appropriate strategy to each type of breadth day, you’ll enhance your ability to trade zero DTE options with greater confidence and accuracy.