By Josip Causic, Online Trading Academy Options Instructor
About a month ago I wrote the article, A Summer of Doji-ing Around, in which I openly stated my sideway bias. In this article, I will revisit the same four markets that I looked at back then and re-evaluate the accuracy of my statement. Next, I will provide an insight into the importance of knowing the small but significant details that could give an edge to an option trader.
Hence, let me start by explaining Figure 1. The chart below shows the four major markets on a daily time frame with only one technical indicator placed on the chart: The 200 day Simple Moving Average (SMA) colored in blue. As it is self-evident from the chart, only one of the four major indices is, at the time of writing this article, trading below the 200 day SMA. The strongest market is the NASDAQ, while both the Russell 2000 and the Standard and Poors 500 have parked themselves exactly at the 200 day SMA.
Figure 1: Four Major Indices The next figure presents very much the same data as the first figure with the only exception being that I have utilized their respective Exchange Traded Funds (ETFs). For a brief recap of the ETFs, the Dow is tracked by the DIA, the NASDAQ by the QQQQ, the Russell 2000 by the IWM, and the S&P by the SPY. Simply by visual comparison, it is obvious both figures present the same information in regards to the 200 day SMA. The U.S. market in general has not done much of anything over the last month or so; although it is true that the NASDAQ, the strongest of the four, has moved a bit higher than the rest.
Figure 2: Four Major ETFs At this point, I wish to shift my focus from the discussion of market direction to option related facts. These four Exchange Traded Funds are somewhat different than many other ETFs that are currently traded. The main difference from the others is that those four are optionable for an additional 15 minutes after the stock market is officially closed. Let me re-emphasize this significant and extremely well-kept secret: The DIA, SPY, QQQQ, and IWM are tradable with options an additional 15 minutes; namely from 4:00 PM (EST) to 4:15 PM (EST). The meaning of this piece of information is as follows: The actual underlying stops trading at the bell and the closing prices recorded are the ones from 4:00 o'clock. However, the options on those four keep changing their premium value, option orders are being filled for an additional 15 minutes, and it is at 4:15 PM that the last option trade is executed. An option trader of major ETFs should be aware of this significant piece of valuable information. Personally, I stop trading at 4:15 PM EST, yet I have noticed that the spread between the Bid and Ask tends to increase significantly at the moment the 4:00 PM EST bell goes off. For instance, on the QQQQ the Bid and Ask on the front month options could be only a-penny-wide, yet from the moment the bell rings the very next second the spread between the Bid and Ask on the same front month options gaps to often a nickel or more.
The figures below show the two closing times. Figure 3 shows the QQQQ option chain for the June, July, and August Quarterlies. I will focus during this example strictly on the call side. Notice that the QQQQ price, two minutes before the close, was at 35.61. From all the listed calls from the strike prices 32 to 39, I will zoom in only on the 34 call which is basically (ITM) in the money. The June Quarterly 34 call had the Bid of 1.69 and Ask of 1.72, the July 34 call was at 2.01 Bid and 2.03 Ask, and the August 34 call was at 2.53 Bid and 2.54 Ask. The screen shot was taken only a couple of minutes before the closing bell on Wednesday, June 24, 2009.
Figure 3: The QQQQ two minutes before the close The next figure's screen shot was taken right after the close and the QQQQ price has decreased only by a penny to 35.60. Notice that only the 33 to 38 strike prices are listed on this figure so the point could be illustrated easier for there is less data that crowds the observers' eyes. Scrutinize the differences in the price spreads. The June Quarterly 34 call had a Bid of 1.65 and Ask of 1.73, the July 34 call was at 2.00 Bid and 2.03 Ask, and the August 34 call was at 2.52 Bid and 2.55 Ask.
Figure 4: The QQQQ right after the close For simplicity's sake, I have extracted the information from the two option chain charts above and placed them in the simple format presented in Figure 5. Basically the spread on the June Quarterlies has gone from 3 cents to 8 cents in width while the QQQQ has virtually moved only a penny lower. In the meantime, the single penny spread on the August has widened to 3 pennies right after the bell.
Month of expiry |
Before the close |
After the close |
June Quarterly 34 Call |
3 pennies wide (1.69-1.72) |
8 pennies wide (1.65-1.73) |
July 34 Call |
2 pennies wide (2.01-2.03) |
3 pennies wide (2.00-2.03) |
August 34 Call |
1 penny wide (2.53-2.54) |
3 pennies wide (2.52-2.55)
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Figure 5: The Width between the Bid and Ask Spread
The last figure presents the Times and Sales of the orders on one of the strike prices on the QQQQ and the prints that have gone through as well as the exact times of them. The exact contract was the July 34 call and on the black side of the chart the last trade was recorded at 1:06 PST for 31 contracts that were filled for 2.01 on the CBOE. On the white side of the chart the last, top trade was printed for a single contract filled through the Philadelphia Stock Exchange (PHLX) at 2.05. These contracts were filled while the majority of option traders were under the impression that the market was closed and the option trading had ceased, as well.
Figure 6: Time and Sales In conclusion, I have pointed out that the four major US markets have not done much of anything in the last month or so. I have utilized the ETFs that are tracking the four major indices to illustrate my point, and I also emphasized the fact that the option traders of those four particular ETFs do have advantage over the equity options traders. For those well-informed option traders, the option market on those four ETFs closes at 4:15 PM (EST). As a final note to all the newsletter readers out there, be aware of these finer nuances for it is these that often give you that edge over the other options traders. Know the products that you are trading inside and out. The more you learn about them, the higher the chance that you might be able to earn more from trading them. Have good trading and a great summer.
- Josip Causic
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