Avoid This Common Options Trading Mistake

Original post

“Time is money,” as the adage goes. There couldn’t be a truer statement when it comes to options trading.

Since options have an expiration date, most people associate strategic timing with options trading. It makes sense – managing your time to expiration is arguably one of the most important components of making a successful options play.

After all, once an option expires, so do your chances of making money… or making more money.

According to my proprietary research, which has helped my readers reap profits in my Automatic Trading Millionaire service and informs my latest work in Trade of the Day, timing really can be crucial…

And this time, I’m not referring to decay or expiration date. I’m talking about the actual times of day that you should and shouldn’t trade options.

The worst time to trade options is between 9:30 a.m. (market open) and 9:50 a.m. ET. If you want to get less for the options you are trying to sell, then trade between those times. Between 9:30 and 9:50 in the morning, stocks trade at their most unpredictable levels of the day. Of course, if you know what you are doing and can shoulder the risk and anxiety of a less liquid market, trading at the open can get you some great fills too. It’s not for the average investor though.

If you haven’t noticed this yourself, then you should spend a couple of mornings studying it. Aside from some aberrations, the normal trading patterns go something like this…

Before 9:30 a.m.: Stocks react to overnight news, earnings results, geopolitical headlines and market pundits in the hours and minutes leading up to the open.

Just after 9:30 a.m.: Then, stocks open with a ton of investors making bets driven by news and nothing else. This is impulse buying and selling.

Sure, you may want to exit a position after bad news or enter a position after good news – but everyone else is thinking the same way.

It’s like a herd of elephants trying to squeeze through a french door: not pretty.

The market makers – those in charge of setting prices based on supply, demand and experience – are well aware of this. If they see a ton of buying, the price will go up quickly – maybe even before the market opens. If they see a ton of selling, they will do the opposite and drop prices sharply.

If that’s a look at the stock market from the inside, you can imagine what the options market is like…

It’s a market where prices are derived from the underlying stock price, but the options trade on leverage. (Think of options as stocks on steroids.) If a stock moves up a couple of percentage points at market open, the option may move up 10%.

The options pricing model incorporates several factors: the expiration date, the volatility of the shares, the volatility of the market and a couple of other lesser inputs. If any of these inputs are magnified in either direction, the effects on an option price are magnified as well.

From 9:30 a.m. to 9:50 a.m., the pressure on the market makers to price options is huge, and they are not willing to take the risk until share prices have settled down. On a normal day, that takes about 20 minutes. On a volatile day, it could be an all-day affair.

You can see this by looking at the spread, or the difference between the bid and the ask, at open compared with the spread later in the day. At open, that difference could be anywhere from 30% to several hundred percent. By midday, that spread could be a fraction of a percent.

Take it from someone who has traded options for more than 25 years – you owe it to yourself to be patient.

Don’t act on that recommendation to buy or sell an option at open unless you just don’t have a choice or you are pro trader wanting to take advantage of a less liquid time frame. Rare cases aside, you are better off skipping the first 20 minutes of stock and options market trading.

Good investing,

Karim

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