Question

Yesterday a stock dropped 21% during premarket trading due to an earnings “miss”. I wanted to buy a put option figuring it would increase 450% in value as the stock dropped. I entered orders before the market opened, but I was not able to get filled. How can I execute my option order in these situations?

Answer

The quick answer to your question is – you can’t. The institutions that make markets in options know the exact minute that earnings are going to be released and they have been adjusting their option prices well in advance of the announcement. In fact, they know all of the major events and issues surrounding the stock (litigation, FDA approval, patents, Board of Director meetings, product release dates). Earnings can create major moves and they raise the implied volatility of the options. Speculators want to buy options in hopes of a big move. Investors want to buy puts to hedge their stock position. In short, as the uncertainty rises, the option premiums increase. The Market Makers have been planning for this moment. Depending on their risk exposure, they might even be trading the stock before the open.

Everyday options go through an opening rotation. On days when the stock and the market are quiet, that process is completed in a matter of minutes. On days when there is a major move, it could take 10 to 15 minutes. When they begin trading, the price movement has been completely factored in. Remember, the Market Makers hold all of the cards. They determine the bid and the ask for each option.

Buying the options after the open during a big move is a risky proposition. The option premiums are inflated and the stock can whipsaw violently. The better trade after a large gap is to wait for a failed bounce a few days later (assuming that you believe that move will continue). The implied volatilities will be lower and the stock will be trading in a more orderly fashion.

Perhaps the biggest issue with your question is the assumption of making fast money. Options might be new to you, but the professionals who make markets have been trading them for decades. They will NEVER put themselves in a position to get “picked off”. There is no easy way to make money in options. It all requires extensive research and due diligence.

Thank you for your question. If you keep reading through my blog, you will learn my approach. I spend 70+ hours a week on research.

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