Trading Options at the Opening

Topic: Trading Options at the Opening

Dear Options Trading FAQ:

I've heard that an order has to be placed by a set time before the market opens to be entitled to the opening price of a particular option. Does it mean that if you put in an a market order before the market opens, you are guaranteed a fill at the opening price?

Isn't it risky to put in an market order before even knowing the bid and ask for that option? I've found that most options don't have a bid and ask price in the first 15 minutes after the stock markets have opened. Why?

What are the trading hours for options? While you're at it, maybe you can give me a tip or two on the different ways to place an order, like at market; at bid; at ask; or in between.

Early Bird Options Trader

Dear Early Bird Gets the Options Premium:

In order to get the printed opening price, your market order must be represented in the opening rotation. Get your order down to the floor at least 15 minutes before the market opening. In busy market times, they may start the rotation procedure even earlier than that. What exactly happens during the rotation?

The individual exchanges can send you specific information, but it usually goes something like this: Starting with certain months and strikes, each option series in sequence is "opened" and a bid-ask is determined. Pre-rotation orders are filled according to this price and further trading is not permitted until all series have gone through the rotation.

As you point out, options can take 10 - 15 minutes to get through with the rotation and start trading. Here are a few implications of the opening procedure:
Playing a news-induced, gap opening? Be careful of the delay in the option trading. By the time the options start, the stock may be correcting from its first thrust already.

Use the opening to get out of your position. Pent up demand for the option can mean good news for the seller. Often the high price of the day is set at the opening. Take advantage of the swell in liquidity to offset positions at the opening.

Does that mean that those playing the opening are always wrong? I wouldn't go that far, but with news related price pushes, they seem to pay too much on that first morning's opening. This is particularly true on Mondays.

As for how to place an order for the opening, that's quite tricky. You are looking to jump on an emerging trend, but don't want to overspend either. If you are reluctant to use a market order, try an "or better" order. Let's say you wake up to the following scenario tomorrow: The S&P December contract is up 1.95, the long Bond futures up 20 ticks, and the OTC tech stocks all indicating higher. The OEX call option you've been watching closed at 2. You don't know what to do.

The market is poised to go to new highs and this could be the impetus to a great one day upmove. On the other hand, the calls will be so rich that any stalling or an early pullback will mean a drubbing to the call holders. Compromise by giving an order to buy the calls at 2 1/2 or better. That way, you have in mind a top price you will pay, but will also be entitled to the opening price if it is lower.

As for the trading hours of options, the answer depends on if it is an equity option or an index option. Equities go until 4:10 New York time (10 minutes longer than common stock) while index options trade until 4:15 p.m.
I'll discuss getting the most out of different types of orders in an upcoming issue.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Pricing, Options Order, Market Opening

The Options Trading FAQ is a reprint of the ground-breaking work done at the dawn of the web age. The generation of option traders that learned the ins and outs of option trading from the usenet will remember these posts fondly.

Copyright 1996 This is copyrighted material about trading options. Do not reuse this text in any manner without permission. This option trading strategy information is valuable and monitored for unauthorized use. Think about your options.