In case you didn't know, options market hours run from 9:30 am to 4:00 pm Eastern Standard Time.
Since the option's value is derived from the price of the underlying stock, once the underlying stops trading, there's no reason for options to continue trading.
This poses a huge dilemma; let me explain.
What Are Options Market Hours?
- Let's imagine you decide to buy a call option on ABC stock ($50 calls for $5) ahead of an earnings release. After closing time and the earning releases, the stock gaps up by 20% to $60. You don't think the gains will hold, so you want to lock in your profits. However, the options market is closed. What should you do?
We have a solution for you: You need to short stock against your long call option. By selling stock against your long calls, it transforms your position into a long synthetic put. The main point here is that you can potentially make money now if the stock suddenly collapses.
1. Options Market Hours: Trading Stock After-Hours
First things first, what is after-hours trading? Let me explain. Firstly, after-hours trading happens after the market has closed.
Secondly, we can also trade the pre-market session, which is just before the opening bell. Regardless of the name, we refer to both sessions as after-hours.
Stock market hours are different than options market hours. Therefore, make sure you know how and when you want to trade.
2. After-Hours Trading Can Be Useful for Traders Who:
- Can't trading during the regular 9:30 am - 4:00 pm EST session
- Like to capitalize on after-hours news
- Are comfortable with additional risk for additional rewards
3. How Is After Hours Trading Even Possible?
Let's say it's 9:00 pm, and you want to buy 1000 shares of AMD at $80. To do so, you most certainly aren't boarding a plane to the NYSE floor to place the trade manually.
For starters, the market isn't even open, and if it was, you wouldn't even get through security at the door. Therefore, options market hours won't allow you to trade.
Instead, you simply turn on to your computer, log into your brokerage account, find the AMD ticker and click the buy button. Your order magically goes into the cloud and a seller's found. Finally, you receive notification that your order's filled, and you're happy.
You can thank the computerized matching system, otherwise known as the electronic market for that. In it's simplest form, the electronic market works by matching buyers with sellers.
What the ECN does is it searches for sellers looking to sell at least 1000 shares of AMD for $80. When a match is found, your trade is completed. At the same time, if there's no match, there's no trade.
One of the additional points of consideration is many brokerages allow after-hours trading. So if you're worried about no being able during regular options market hours, fret no more. What's more, many don't even charge more for this flexible alternative!
Can You Buy and Sell Options After Hours?
- Can you buy and sell options after hours according to options market hours? Unfortunately the answer is no. You can only trade options when the market is live. Which is 9:30am to 4pm. If you want to trade after hours, you're going to have to trade stocks. To reiterate, Robinhood option trading is during market hours.
1. Are There Any Differences Between Regular and After-Hours Trading?
Unfortunately, order types are limited when you decide to trade the market after-hours. Please note, you can only use limit orders for buying, selling, or shorting. And before I forget, if you like to place customized orders with special conditions, you may be disappointed.
Below you'll see a list of trades you won't be able to execute after-hours:
- Fill-or-Kill Order: a conditional type of time-in-force order to be fully executed immediately or not at all.
- All-or-None: an instruction to fill the order completely at the specified price or cancel it. In other words, either sell it all or sell none at all.
- Immediate-or-Cancel: An order to buy or sell that try's to execute all or part of the order right away and then cancels any unfilled portion of the order.
At this point, you're probably wondering why you can't execute these types of orders after hours. Despite the flexibility ECNs offer, the complex nature of the trade restrictions makes them challenging to execute.
Can I Trade After-Hours? Absolutely! The doors of the exclusive after-hours club, once reserved for institutional investors, are now wide open.
2. What Brokers Offer After-Hours Trading?
The list is quite lengthy but here are a few of my favorites:
- TD Ameritrade
- Charles Schwab
3. Advantages of Trading Outside of Regular Options Market Hours
Many options traders are embracing after-hours trading and for a good reason. The post-session offers several advantages such as:
- Convenience: No need to hide from your boss at your desk to place trades. You can now trade from the comfort of your bedroom, the beach, or a hut in the Arctic. You get my point.
- Timing. You can act swiftly to the news. For proof, look no further than the timing of earning's releases. Most companies release their earnings at the close of the regular session, and that's when all the action happens. With after-hours trading, you can place trades in reaction to the news without waiting for regular options market hours.
- Markdowns. Even though volatility poses a risk trading after-hours, prices sometimes are more appealing after hours.
- Access To Foreign Market Information. Because of the different time zones, activity in foreign markets takes place after U.S. stock market hours. Extended-hours trading keeps you in the know. Knowing what is going on in the foreign markets is crucial, as in many cases, it directly impacts U.S. market prices.
4. Disadvantages of Trading Outside of Regular Options Market Hours
Even though there are numerous advantages to trading after hours, you're faced with several risks that include:
- Price Uncertainty: Quotes during regular market hours are consolidated. All this means is that they're a representation of the prices against all of the open trading venues. Obviously, once the market closes, there are fewer venues to compare prices to. As a result, the price might not be an accurate representation of what the prices will be when the regular session resumes.
- Lower liquidity: If you've spent any time in the after-hours market, you'll know there are fewer trades happening. Because fewer shares are trading, we experience a large price spread between buyers and sellers. In some cases, the stocks you want to trade just aren't available during the after-hours session. Apart from this, the lower liquidity can, unfortunately, result in higher trading costs.
- Restricted Order Types: Only limit orders are allowed when trading after-hours. At the same time, this may not be considered a significant risk for traders; you do need to understand its ramifications. For example, if the price moves away from the limit order, your trade won't be completed. So as to avoid this, ask your broker if they put the trade through the following day.
- Poor Fill Price: Your goal when trading is to get the best possible fill price; that's a no brainer. However, when trading outside the options market hours, the best prices may not be available. In this case, you are less likely to get reasonable prices when you trade after 4:00.
Options Market Hours Bottom Line
Options traders can use the after-hours trading to lock in gains or hedge using equities. Since options market hours are limited to regular trading hours, after-hours trading is a great way to both profit and protect profits on expected news.
Nevertheless, executing trade after regular market hours poses inherent risks. At this point, it's safe to say the regular trading hours offer better liquidity and more efficient markets. In other words, prices are more reflective of fair value.