Placing Trades Based on Overnight Information

If you’ve been a subscriber for a while, you’ve seen me reuse this subject more than a few times. That’s because one of the questions I often get asked  is how you are supposed to be able to place a trade when the pricing information I provide is already outdated. This subject also keeps resurfacing as our service grows and new members come onboard, which is another reason I like to revisit this subject every so often.

Even if you are alerted to a new trading highlight I post while the market is open, there’s always a chance that the stock will have moved away from the prices I used when I published the article. If you aren’t able to see the article until after the market has closed, the earliest opportunity you’ll have to place the trade is the next morning. By then, it is possible – even likely – the stock will have moved enough as to make the pricing information, including what strike price your put should carry, dated and irrelevant. 

Before going further, let me be clear: the prices I list when I highlight a trade are not necessarily the prices I’m saying you should plan to work with – they are just the current prices as of the moment I wrote the article. You might see the same pricing when you look at the stock, and you might not depending on where the stock is when you have an opportunity to check. I use those prices only to emphasize that there is an opportunity to be had, and that will hopefully still be available with a reasonably similar return when you are able to place a trade.

The truth is that I put the same limitation on myself; I don’t place any trade I’ve highlighted until the day after I’ve published the highlight. I do this for a couple of reasons. First, to avoid any perception of “front running” the trade, it makes sense to me to wait a little while to give you an opportunity to analyze the trade I’ve written about so you can decide what you’ll do about it. The second, and most important reason is that I want these posts to be as practical, useful, and realistic as possible. To me, that means that when I write about my trades, I want my system to deal with the same everyday issues you do.

The best way to explain how I deal with dated pricing information is to give you an example. A trade I placed in 2019 on OSK is a perfect example of how sometimes market conditions change the suitability of a trade I’m thinking about. When I wrote about the stock, it was sitting just a little above $77 per share. OSK”s options are not as heavily traded as a lot of stocks I look at, which is part of the reason that the stock lists only monthly, and not weekly options, but also why the available strike prices on the stock are listed in $5 increments. That meant that at $77, the stock was roughly in the middle of the range between $75 and $80 strike prices. At that point, the $75 Bid price was still attractive enough to make a trade useful, which is why I decided to use it.

Fast forward one day, and it’s time to place my trade. OSK opened the day at about $77.50, and by the time I got it, was closer to $78 per share. It finished the day above $78, and the implied volatility on the $75 dropped dramatically enough on the $75 strike price to make that trade impractical. That meant that I could either sell the $80 strike price, which was in-the-money, or I could look at the $75 strike price for May. I don’t like using in-the-money for put sales, since that just increases the odds of an assignment at a higher price than I’m usually willing to pay at the time. And while the May $75 was still offering about a 2% premium on capital committed, that was for a time period of about 45 days, which is longer than I prefer. My choice? Pass on the trade altogether. Sometimes, the market moves far enough away from the price you might be willing to work with for any given situation, and that’s what happened in this case. It’s better, in my opinion, to pass on the trade and wait for another week, and another opportunity, than it would be to force a bad trade.

Another example came just this week, with Tuesday’s covered call on CPB. When I published the post and sent the alert to our trading group, the stock was around $51.50. I was assigned the stock at $50, and with activity picking up on the bullish side, the $51 covered call (a little in the money) expiring on April 9 was useful enough to be attractive, offering a 1.7%, not-called-out return while also setting up a useful capital gain if I get called out. Wednesday morning, however saw the stock drop a bit, and the premium on the April 9, $51 call had dropped to less than 1% on a not-called-out basis. That is still above the 1.5% mark I usually target on a monthly basis, but since the stock has been more than $1 away from my assignment price when I wrote the article, it also gave me a little room to consider alternatives.

CPB is a stock that no only offers weekly options, but also works in $.50 strike price increments. The April 9, $50.50 call was available at the same trading price ($.85) I had written about for the $51 call. That’s closer to my $50 purchase price, meaning that if I am called out, I won’t get the same capital gain on the stock sale, but with a very useful premium, and enough of a capital gain for my purpose,  I sold the April Week 2, $50.50 strike price and called myself happy.

I should note here that there are trading rules that I consider inviolate, and others that have a little more subjectivity to them. An example of a trading rule I will NOT break is the requirement to work only with fundamentally strong, dividend-paying stocks. That means that if I’m considering a stock with good fundamentals that suddenly suspends their dividend for the foreseeable future (that happened a lot in 2020), I remove them from my watchlists – even if the suspension has a solid fundamental basis behind it. By the same token, an obvious degradation in a company’s fundamentals that changes my outlook for their long-term prospects is an automatic exit trigger for me – even if I’m holding shares in the stock at a significantly lower price than I bought them at. These are linchpins of my system that I’m not willing to adjust or compromise on.

Selling an out-of-the-money put versus in-the-money is a rule that has a little bit of subjectivity. I prefer out-of-the-money options whenever possible so that if I do end up being assigned on a put sale, I give myself a little more of a discount on the stock purchase than I would have if I bought the stock at its current price, and the plain fact is that an out-of-the-money option generally has a better chance of expiring worthless than an in-the-money option does. However, depending on the case, I’m willing to give this rule some wiggle room. This week’s put sale on Kellogg Co. (K) is a good example of a case where an exception seemed appropriate.

Sometimes a stock will make a big move the next day, which does change the analysis profile. It doesn’t mean that there isn’t still a trading opportunity, but it might mean you should adjust the strike price you use. Remember, you don’t have be a robot, working only with the strike prices or expirations that I highlight from week to week; you may find that even on the same stock, you like a different contract better than the one I identify. That’s perfectly okay, as long as you’ve done the research that makes clear not only what the useful opportunity for that contract may be, but also what kind of associated risk you have to be willing to accept. At the very least, you should review the analysis that led you to the trade so you can decide for yourself if you need to make an adjustment, keep the trade’s parameters the same, or simply drop it and move on to something else.

If you are a new subscriber, please take some time to review the videos in the Getting Started area of the website. These will give you a pretty comprehensive view of the value-oriented approach I use to generate income with put selling and covered calls. You will also find it useful to read my Frequently Asked Questions article. Also feel free to review my previous posts as you’ll find additional answers to many of the questions you may have.

8 thoughts on “Placing Trades Based on Overnight Information”

  1. It is a fluid market out there, things can change in an hour or less. The recommendations are done in a snapshot of time and subject to change depending on fluctuation in underlying price of the stock, bid/ask spreads, expectations and of course risk management and risk tolerance. That is what I like in our group, the possibility of 20 different trades on one recommendation and all of them right for the person making the trade.

  2. Thomas,
    Another great article. I do not know if it would benefit the group or not, but after hours trading has always been a mystery to me. Who can trade, what brokerages offer it, does one have to have special authorization to do so? For instance, Shane has a buy on TEVA. One can either by the stock or buy long call options on that position. I specifically bought calls on TEVA, but I went out 3 months farther than his expiry date, plus I went into the money one strike price more than what he did on his buy alert. I notice this morning that my brokerage account was down about $300 less than what it closed at, and I identified it was the options on my TEVA position. I have the 10 strike, sept calls. They closed at $1.18 bid, but closed Friday at $2.14 up 12c for the day’s trade. Apparently that happened after the market. I didn’t think options traded after hours???
    Thanks, Jim

  3. Hi Jim, I see this occurring on my account overnight and on weekends as well. With TEVA it is an Israeli generic drug manufacturer and as such it trades on the European and possibly Asian markets as well as the US American markets. Thus if TEVA drops in the Euro markets overnight then the long calls will drop there as well and this drop is then reflected in your presumably US American account. I have a friend/mentor who trades the European markets as well as the North American ones. He brings a coffee to his wife in bed along with a statement of her EURO holdings every morning at 6 AM. I used to trade in Krona on the Norwegian exchange a few years back but now follow the KISS rule and stay mainly with the US American markets. There may be the possibility for after hours trading with your US account but we should find time for life outside of trading. I hope this helps.

    1. Joe, thanks for another great comment. That is extremely useful perspective. Jim, check with your broker; some may make after hours trading available (stocks or options), while others may not.

      Thank you both for your questions and comments in this thread! All of it is great information to have!

      Thomas

  4. Joe, Thomas:
    Thank both of you for responding to my question. Joe, I definitely am not interested in trading after hour, nor pre-market which I guess is essentially after hours. I know TEVA is an Israeli company, and Joe your perspective on the after hours trade of the common makes sense, but, I did not realize that American options traded after hours. All this is great learning perspective, and I thank both of you for your responses.
    Jim

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