One of the BCI guidelines for selling covered call and cash-secured put options is that we require a bid-ask spread of $0.30 or less and/or an open interest of 100 contracts or more. Typically, options with large open interest will also be associated with smaller spreads. This makes it easier to close short positions at a reasonable price. There are times when we check option chains and find securities that have robust open interest but wide spreads. One of the reasons for such a discrepancy is the decreased trading volume that takes place in after-hours trading. This article will highlight such an event using a real-life example with Viper Energy Partners LP (NASDAQ: VNOM).
What is after-hours trading?
This is trading that occurs outside normal market hours (9:30 AM – 4 PM ET). Trading takes place through an electronic communication network (ECN) which allows buyers and sellers to match up trades (the highest “bid” price is matched with the lowest “ask” price). Trading volume is significantly lower after hours so bid-ask spreads are much wider. The wider spread is not a reflection of any change in the value of the underlying security but simply a matter of lower option trading volume.
Real-life example with VNOM: After-hours on May 18, 2018 prior to the June contracts
Note the wide spread of $1.25 ($2.25 – $1.00) despite huge open interest (6437 contracts).
Real-life example with VNOM: Market-hours on May 22nd, 2018 during the June contracts
Note the more typical spread of $0.35 ($2.75 – $3.10).
When an option chain shows a wide bid-ask spread despite substantial open interest, it may be a result of lower trading volume that occurs in after-hours trading. Final trading decisions must be made with information confirmed during standard trading hours.
The Blue Hour Webinar # 12: When to Roll our Covered Call Options
***Premium site…premium members only
February 7th – 10th, 2019
Orlando Money Show
Omni Orlando Resort @ Champions Gate
February 7th – 10th 2019
1. Getting Started with Stock Options: Creating Monthly Cash Flow with Covered Call Writing
February 8, 2019, 3:10 pm – 3:40 pm
2. Getting Started with Stock Options: How to Select the Best Options in Bull and Bear markets
February 9, 2019, 2:00 pm – 2:45 pm
This week’s economic news of importance:
- Personal income Sept. 0.2% (0.4% expected)
- Consumer spending Sept. 0.4% (as expected)
- Core inflation Sept. 0.2% (0.1% expected)
- Case-Shiller home price index Aug. 5.8% (67.0% last)
- Consumer confidence index Oct. 137.9 (136.4 expected)
- ADP employment Oct. 227,000 (218,000 last)
- Weekly jobless claims 10/27 214,000 (212,000 expected)
- Productivity Q3 2.2% (2.3% expected)
- Markit manufacturing PMI Oct. 55.7 (55.9 last)
- ISM manufacturing index 57.7% (58.7% expected)
- Construction spending Sept. 0.0% (0.2% expected)
- Nonfarm payrolls Oct. 250,000 (202,000 expected)
- Unemployment rate Oct. 3.7% (as expected)
- Average hourly earnings Oct. 0.2% (0.1% expected)
- Trade deficit Sept. -54.0 billion (-$53.6 billion expected)
- Factory orders Sept. 0.7% (0.5% expected)
THE WEEK AHEAD
Mon Nov. 5th
- Markit services PMI Oct.
- ISM nonmanufacturing index Oct.
Tue Nov. 6th
- Job openings Sept.
Wed Nov. 7th
- Consumer credit Sept.
Thu November 8th
- Weekly jobless claims 11/3
- FOMC announcement
Fri November 9th
- Producer price index Oct.
- Consumer sentiment Nov.
- Wholesale inventories Sept.
For the week, the S&P 500 moved up by 2.42%% for a year-to-date return of 1.85%
IBD: Market in correction
GMI: 0/6- Bearish signal since market close of October 8, 2018
BCI: Selling only in-the-money strikes until market recovery is confirmed. Remain confident in long-term health of the stock market.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a bearish-to-neutral tone. In the past six months, the S&P 500 was up 5% while the VIX (19.61) moved up by 23%.
Wishing you much success,
Alan and the BCI team