I get this question occasionally, and this is a good time to address the topic. The US stock and option markets open at 9:30 am Eastern Time. Stocks begin trading immediately, but stock options don’t. There is a rotation in which options begin trading and perhaps 15 minutes after the open, all stock options are trading.

However, it is almost never a good idea to buy or sell stocks during the market’s first 30 minutes, known as buying or selling the open. The reason is that stocks rising at the open often fall; stocks falling on the open tend to stabilize and maybe rise. The first 30 minutes is sucker time, almost always. Traders frequently get panicked on the open and want to sell a dropping stock as high as possible, or buy a rising one quickly lest a hot opportunity get away. And occasionally this will be true.

But more often than not, you’ll wish you had waited if you trade the open, whether the stock is up or down. Some consider the first 20 minutes the open, but I am more comfortable with 30.

Since all equity options don’t begin trading immediately (those further from the money open first), it is pretty much a necessity in option trades to avoid opening or closing them in the first 30 minutes. Don’t worry about missing something: call premium is a function primarily of intrinsic value, if any, delta and implied volatility. The first 30 minutes of trading will not have much effect on option premiums except for those deeply ITM, and running covered calls in the first 30 minutes usually means you will either be cheated on premium or overpay for the stock - or both.

This entry was posted on Friday, May 4th, 2007 at 8:12 pm and is filed under Workshops. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.