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Everything Your Need to Know About After Hours Option Trading

Jeff BishopJeff Bishop ·

Options trading market hours run from 9:30 a.m. to 4:00 p.m. eastern standard time, though you have likely heard news reports about the results of after hours options trading. After hours options trading occurs during one of two sessions that occur outside of normal business hours. These periods are called after hours options trading, which occurs after the market has closed, or pre-market trading, which is a session before the open bell rings. In general, both sessions may be referred to as extended-hours trading. After hours options trading can be beneficial for:

  • Traders who cannot trade during regular session hours.
  • Traders who are looking to take advantage of recent news.
  • Traders comfortable with a little more risk to gain bigger rewards.

What Is After Hours Options Trading?

The ability to trade during extended hours has now been made possible by a computerized matching system referred to as the electronic market. Simply put, the electronic market works by matching up buy and sell orders. If you are looking to buy 300 shares at $55, the computer will search for orders listed that are looking to sell at least 300 orders for $55. When it finds a match, the trade is completed. In the event no match is found, the order will not be completed. Many companies will offer trading services after hours and charge the same commissions as those performed during the regular market day.

Are There Major Differences Between Regular and After Hours Sessions?

There are some differences between regular session trading and trading that occurs after hours. When trading after hours, not all types of orders may be accepted. When trading after hours, you may only use limit orders for buying, selling, or shorting. You may not be able to place orders that contain special conditions or restrictions such as:

  • Fill-or-Kill: These types of trades are to be executed immediately and fully or not at all.
  • All-or-None: This type of trade means that all of the stock must be sold in its entirety, or none should be sold at all.
  • Immediate-or-Cancel: This type of order means that the stock should either be bought or sold immediately.

The restrictive nature of these special orders, both with timing and completion, makes it difficult to trade after hours. Therefore these types of orders are often not accepted when trading before or after regular session hours commence.

Can Anyone Trade After Hours?

After hours trading was once reserved for institutional investors, but now with the ECN capability, it is widely available for any level of investor. The new system also allows institutional investors to invest anonymously as well, if they choose to do so. After hours trading has become more widely utilized in the past few decades, and an increasing number of investors are actively embracing it. There are even brokers now that work in after hours trading such as TD Ameritrade, Fidelity, and Charles Schwab.

Are There Advantages for After Hours Options Trading?

The reason many investors are embracing after hours trading is because of the several advantages that the post-session offers.

  • Convenience: Being able to trade outside of normal business hours can offer an added convenience for those who may not be able to conduct trades during the regular session due to work or other time constraints. During the after hours session, they can now check out current quotes and be able to trade when it is convenient for them.
  • The Ability to Respond to Recent News: Most companies will release their earnings at the close of the regular session. With after hours trading, traders can place trades in reaction to the news without having to wait for the new session to begin. This can help them to avoid major price swings.
  • Pricing opportunities: Even though volatility can be a risk with after hours trading, traders may also find some more appealing prices occurring after the regular session has ended. When you have learned how to navigate your way through after hours trading, you may find some great opportunities

What Are the Risk of Trading After Hours?

While there are many options to after hours options trading, there are also some increased risks of trading outside of the regular session hours. Some of the most serious risks you may face include:

  • Uncertainty in Prices: When you see quotes in the regular session, you will be looking at consolidated numbers, which are a representation of the prices against all of the trading venues open. Once the regular session has ended, you may see prices from as few as one venue, which may not provide as much of an accurate representation of what the prices will be when the regular session resumes.
  • Lower Liquidity: Since fewer shares will trade during the after hours session, you may find a more significant spread between the highest price offered by buyers and the lowest price offered by sellers. You may also find that some stocks are not available for trading during the after hours session. Lower liquidity can result in higher trading costs and more uncertainty when it comes to prevailing security prices.
  • Only Limit Orders Are Allowed: When using a brokerage company for after hours trading, you will find that they only allow limit orders, which means at the limit price or better. While this may not be considered a significant risk for many investors, it is crucial for investors to understand this. If the price moves away from the limit order, then the trade will not be completed. When using a broker, you should always inquire as to whether or not the order will be put through the next day if it is not completed during after hours.
  • No Calculation of Index Values: When you are a trader dealing with an index-based product, after hours trading may not be the best option for you. There is often a lock of calculation or dissemination of the index value during after hours trading that could put the investor at a disadvantage over professionals who may have access to a special system which can calculate these indexes.
  • Trade Order Handling: The ultimate goal of trading is to get the best possible price, no matter if you are buying or selling. When buying and selling after hours, the best prices may not be available. It may be in your best interest to consult with your broker to see their process for handling after hours orders so that you can make sure you are being steered to the best price.
  • You Will Be Trading Against Experienced Traders: Well-informed, experienced, and professional traders will often use the after hours trading session to extend their trading day. This means you may be going up against traders who likely have more knowledge about trading and experience with after hours trading than yourself.
  • Higher Pricing Volatility: Since there are significantly fewer securities to trade outside of the regular session hours, you are likely to see more significant price fluctuations than you would during a regular trading session. When trading after hours, you should plan for this volatility and go into the sessions knowing that the trading prices will be widely different that they were during the normal session.

Is After-Hours Trading Right for You?

After hours trading is an option that is open to every type and level of trader, but it is not always the best fit for everyone. Traders who are more along the lines of buy-and-hold investors, or those making long-term investments, may find that after hours trading adds unnecessary risk to their investment portfolio.

You will also want to see if trading outside of regular market hours is a practice with your trading platform, or that your broker performs these services. You will also want to check with your broker or the trading platform to learn all the rules and regulations that come with after hours trading so that you can be sure you are following the correct procedure.

When you have determined that you are ready to embark on the world of after hours trading, start with some small trades to get your feet wet and explore the process before investing too heavily.

What Are the Regular Session Market Hours?

To take advantage of after hours trading, you will need to know what the regular market, premarket, and after hours sessions hours are for your chosen exchange. Hours for trading for both the New York Stock Exchange and NASDAQ are as follows:

  • Regular Trading: Weekdays from 9:30 a.m. until 4:00 p.m.
  • After Hours Trading: Weekdays from 4:00 p.m. until 8:00 p.m.
  • Pre-Market Trading: Weekdays from 7:00 a.m. until 9:30 a.m.

All U.S. stock exchanges are closed on many holidays throughout the year. On these days, there will be no regular trading, pre-market, or after hours trading sessions. Exchange holidays include:

  • New Years Day
  • Martin Luther King, Jr. Day
  • Washington’s Birthday
  • Good Friday
  • Memorial Day
  • Independence Day
  • Labor Day
  • Thanksgiving Day
  • Christmas

So can you buy options after hours? The answer is yes if you know what you are doing. It is never too late to build up the best portfolio you can to increase your wealth or grow your money for retirement, and after hours trading may hold the key to accomplishing that goal. If you are ready to get started with after hours trading and are looking for a little guidance, consider attending one of our investing webinars, or download our free trading e-book today, to learn valuable investing information to help you navigate the exchange and improve your portfolio.

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