Many members of our BCI community have commented on the wide and, therefore, unfavorable bid-ask spreads that are published before the markets open and after they close. This article will explain this deviation and address how to manage these scenarios.
What is after-hours trading?
This is the exchange of securities outside the exchange’s normal trading hours (generally between 9:30 AM ET and 4 PM ET Monday through Friday). Trading is facilitated by an electronic communication network (ECN) which allows buyers and sellers to match up their buy/sell orders for a specific security. After-hours trading starts at 4 PM ET and ends at 8 PM ET.
Pre-market trading hours
Pre-market trading begins at 8 AM ET and ends at 9:30 AM ET when normal trading commences.
Volume and bid-ask spreads during after-hours and pre-market trading
There are many fewer players during these trading hours compared to normal market trading hours and so the bid-ask spreads become much wider. This, along with potential for greater price fluctuations, create more risk for investors. Those who do trade after-hours would make the case that opportunities can be created that may not be available when there is normal market trading volume.
How are bid-ask spreads published?
The published bid price is the buy order with the highest price and the published ask price is the sell order with the lowest price and exchanges attempt to match these orders up. During normal trading hours with greater volume, there is a much better opportunity to execute these matches with little difference between the bid and ask prices. With the lower after-hours liquidity, there may be large gaps between the published bid and ask prices.
Why are spreads so wide before and when markets first open on Monday morning?
When setting bid-ask spreads before the opening of regular trading hours, particularly on Monday morning, market makers might take some caution until they get comfortable with the direction of order flow for that day. This could explain wider spreads at the opening bell that tighten once the trading day has settled down. In other words, market makers will do their best to set IV (implied volatility) levels but will have some uncertainty until orders start coming in. If the spreads are too tight, they might get stuck trading too much on one side of the market, which is exactly what they don’t want to do.
Option-Chain with Low Volume and Wide Bid-Ask Spreads
Discussion
After-hours trading creates opportunities and higher risk than normal market trading. It is not appropriate for most retail investors as institutional investors who engage in after-hours trading have more resources, making it problematic to compete against them. The best time to evaluate bid-ask spreads for our trades and to execute our covered call writing and put-selling trades is between the hours of 11 AM ET and 3 PM ET.
No price increase for premium members: Final Reminder
On November 1, 2021, BCI will be raising membership rates for new members only. This will not apply to current members. It’s been 4 years since we had a rate increase. In that period, we have added dozens of training videos, additional downloads and resources and more quality data to our stock and ETF reports. We are fortunate to have such a robust and expanding membership and strive to provide the best high-quality information and tools at the lowest industry prices.
This price increase will not apply to current active members as you are grandfathered into the current rate for life or as long as your membership remains active. This is our way of showing our appreciation to our long-term members.
The increase for new members will go into effect on November 1, 2021 as follows:
Monthly: $19.95 for the first (trial) month and $57.95 each 30-days thereafter (currently $49.95).
Annual: $657.40 for the first 13 months (includes a reduced first month and a free last month) and then $695.40 every 13 months thereafter (includes 1 free month). Currently $569.40 and $599.40.
All new members who subscribe between now and 10/31/2021 will be grandfathered into the current rate and will see no price increase on 11/1/2021.
Thanks to all our loyal members for your support over the past 14 years and for putting on the financial map.
Premium membership information
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan,
I have always admired the depth of your knowledge and enjoyed your teachings very much.
Blessings,
Brenda
Upcoming events
1.Money Show Virtual Event: Free webinar
Tuesday November 2nd from 1:30 PM ET to 2:00 PM ET
Converting Non-Dividend Stocks into Dividend Stocks
Selling call options to create dividend-like cash-flow
2. Mad Hedge Summit: Free webinar
December 8th – 10th
Time, date, topic and registration link to follow
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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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Alan,
5 months ago, I bought 100 shares of inmd when it first appeared on our stock list. I also started selling two 10 delta put options (they only have monthlys) on inmd. Well, inmd split 2 for 1 so I now own 200 shares and I’m selling 4 contracts each month. The price has doubled since I first bought these shares.
For the November options I waited for the earnings to pass as you tell us and then sold 4 contracts of the 67.50 put strikes (10 delta). This week I was able to roll up to the 77.50 put strikes because the price has gone up even more. Rolling up made another 200 dollars for me.
I’m so excited. Thanks for all you do.
Iris
Iris,
You made my day. All your due-diligence and preparation is paying off.
Keep the good news coming…
Alan
Hi Alan,
I had a question about this article. https://www.thebluecollarinvestor.com/treasury-bond-yields-and-the-stock-market/
If Treasury Bond yields were to rise above 5% for a prolonged period of time (say many years), is the suggestion that the markets will be so negatively impacted that your option selling strategy of selling calls on the best performing stocks in the best performing industries would not really work on a consistent basis?
Thanks,
Roger
Roger,
Absolutely not.
The article states that historical data shows that the market does not begin to get negatively impacted until the 5% threshold is reached. For some, 5% is an acceptable return while also benefitting from no-risk investments.
This is not an acceptable return for me and I’m quite sure for most in our BCI community. There will be plenty of opportunities to make potential 5% Treasury returns pale in comparison to our option-selling profits. Needless to say, we’re a long way from 5% Treasury yields.
This becomes an individual investor decision… 5% with no risk or much greater potential returns while incurring low-risk. There is no right or wrong. For me, I’m still in without blinking an eyelash.
Alan
Thanks Alan.
So do you see rising inflation as a threat to our option selling strategy? If inflation spirals out of control like it did in the 1970s, will there likely be enough good candidates to employ our strategy of selling calls on the best performing stocks in the best performing industries?
Roger,
Rising inflation, if and when it occurs, is not a friend to our economy. However, stocks are a great hedge against inflation as rising prices favor greater corporate profits.
I’ve been trading options for well over 2 decades and have always experienced opportunities to sell options in a well diversified portfolio.
It may become more challenging at times as the number of elite choices decrease but our mission, as CEOs of our own money, is to locate those exceptional securities that are still available. They will be there.
Our education and due-diligence will result in our ability to succeed in even the most challenging of market conditions.
Alan
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 10/29/21.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Best,
Barry and The Blue Collar Investor Team
Alan,
One more problem with After Hours/Pre Mondays is that you can not place CCs or CSPs immediately after buying a stock, and therefore you risk losses if the stock drops.
So, After hours are only suitable for selling your stock.
Roni
Roni,
In my humble opinion, after-hours trading is appropriate only for sophisticated, experienced investors.
Some of our international members use buy/write combination forms to enter trades after hours due to time-zone issues. They are technically not using After-Hours platforms as their trades are executed during normal market hours but they are assured of receiving the net debit (or better) instructions offered to the broker.
Alan
Alan,
Yes, I agree. That’s why I never dared place after-hours orders.
Very interesting this information about international members.
Thanks – Roni
Alan,
Do you have a particular delta you use for covered calls. I’ve heard recommendations between 40 and 50. What say you?
Thanks a lot,
Marilyn
Marilyn,
We base our strike selection on overall market assessment, personal risk-tolerance and initial time-value return goal range, not on one specific Delta.
If we are bullish on the market and want to take advantage of share appreciation, we would favor call strikes with lower Deltas (10 to 50) as we move deeper out-of-the-money.
If we are defensive in bear and volatile markets or if our personal risk-tolerance dictates, we favor strikes with Deltas between 50 and 100 as we move deeper in-the-money.
By factoring in market tone, personal risk-tolerance and time-value return goals, we will be guided to appropriate strikes which will have a specific Delta but we do not use one specific Delta to determine all our strikes. If we did, we would be losing flexibility in our trade analysis.
Alan
Hello Alan,
I’ve been with you and your program for about 6 months and have enjoyed learning about calls and made some good money doing so. I’ve noticed that some trading platforms have probabilities of strikes being ITM and OTM, but haven’t come across references to you using them in determining strike prices. They seem like a potential valuable tool for strike selection. Perhaps you could direct me to some material you have published or address the subject in one of your video conversations.
Thanks,
John
John,
Sure. Check out my publications regarding Delta. One of the definitions of Delta relates to probability of expiring in-the-money. I have also recently hosted webinars on the use of implied volatility to project an expected trading range of a stock for a given contract expiration period.
As a premium member, you have access to our “Expected Price Range Calculator located in the “resources/downloads” section of our premium member site.
Also, have a look at a recent webinar I hosted and archived on the member site (see image below).
Here are other publications related to this topic:
https://www.thebluecollarinvestor.com/delta-and-our-covered-call-writing-decisions/
https://www.thebluecollarinvestor.com/using-delta-to-create-low-risk-high-return-put-selling-trades-a-real-life-example-with-etsy-inc-nasdaq-etsy/
https://www.thebluecollarinvestor.com/delta-defined-from-three-perspectives/
(definition #3)
https://www.thebluecollarinvestor.com/implied-volatility-and-expected-price-movement-of-our-stocks-during-the-life-of-a-contract/
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
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Alan and the BCI team
Alan,
Let’s say i buy XYZ at $55. The stock is at $49. I sell the $55 call, collect lower premium as its quite OTM.
lets say the stock goes to $56, during the contract term. I dotn really want to hold it , If i BTC then sell at current market price, does that mean I did make monies to $55? I dont think so as i would have paid a lot to buy back the covered call.
im confused lol
thanks
George
George,
In the scenario you present, you bought the stock at $55.00 and sold it at $56.00 for a $100.00 credit per-contract. Then factor in your net option credit or debit to evaluate the total realized profit or loss.
Let’s say the original $55.00 call generated $0.50 and the cost-to-close was $1.25 leaving a net option debit of $0.75 per-share. The final realized net position would be +$0.25 per-share or +$25.00 per-contract.
You could also allow assignment if the strike is in-the-money at expiration and not have a cost-to-close debit and shares will be sold at $55.00, leaving a realized net option credit.
Alan
Hi Alan,
Say I have 300 shares in INTC and share price today is $50
Is it totally out of question (no sense) to SALE COVERED CALL JUNE 22 @ $30 STRIKE IN MONEY and received $6120 USD?
Logic: If there is stock market crush by june 22 and goes below 30 = bonus. If not you sale with profit (I purchased original stock @46
I could invest $6120 in say Physical Gold or Silver now.
What do you think?
Peter
Peter,
We measure the viability of our trades by first establishing an initial time-value return goal range and using our required skills (stock selection, option selection and position management) to minimize the risk inherent in our trades.
Let’s first evaluate the potential returns of this hypothetical trade. The $6120.00 certainly looks enticing but that is for 3 contracts so let’s simplify matters and break this trade down into 1 contract percentages which will be the same for 3 contracts.
Buy INTC at $50.00
STO 6/2022 $30.00 call at $20.40
Approximately an 8-month return
Of the $20.40, $20.00 is intrinsic-value, the amount we will lose on the sale of the stock. $0.40 is the time-value component of the premium. Using the $20.00 to “buy-down” our cost-basis and performing the calculations, we find an annualized return of 2%.
Furthermore, taking such a long-term commitment, forces us to be subjected to multiple earnings reports which could negatively impact our trade.
For me, an annualized return of 2% and incurring the risk of multiple earnings reports would eliminate this trade as a consideration.
Each investor must establish the parameters of their trading strategies and then the calculations will provide the clarity required to final investment decisions.
Alan
Barry,
I am still holding 400 AVTR shares from my initial 700 shares, and they keep going South, 🙁
I found the following article at Yahoo finance:
Director Of Avantor Sold $4M In Stock
Rajiv Gupta, Director at Avantor (NYSE: AVTR), made a large insider sell on November 1, according to a new SEC filing…
Do you believe this ticker will recover any time soon?
Roni
Roni,
I took a look at AVTR. Some thoughts:
– The chart is weakening
– Lower highs and lower lows…this is bearish
– There chart appears to show a “descending triangle”…another bearish indication
– However, the MAR (at 1.60) is still showing a “buy”
– Friday’s chart showed a “hammer” at support…this could indicate a potential turnaround
– Check out the following article from Finviz, it might give you some additional insights:
https://finance.yahoo.com/news/time-consider-buying-avantor-inc-105407026.html
For corporate officers, they have to file their stock sales plans months before they actually sell stock or exercise any stock options that they may have…so this specific event may or may not be critical at this point in time
Best,
Barry
Barry,
Thank you for taking the time to check this out so thoroughly.
I have read the article from the link that you sent me, and feel confident to liquidate AVTR at a significant loss and use the resulting cash to place a new monthly trade on a different stock.
Your current Stock Screen shows plenty of bold tickers for me to move ahead.
Roni