Can You Buy Options in the Premarket?
Learn why options trading typically adheres to standard market hours, unlike other securities, due to their unique market mechanics.
Options trading is primarily confined to predefined regular market hours. Investors often inquire about buying options outside of standard market sessions, such as in the premarket. This article explores the reasons for these limitations.
Standard Options Trading Hours
Options trading on major U.S. exchanges typically occurs from 9:30 AM to 4:00 PM Eastern Time (ET), Monday through Friday, excluding market holidays. This 6.5-hour window aligns with the regular trading schedule of major U.S. stock exchanges. These fixed hours support maximum liquidity and efficient price discovery, essential for orderly market operations.
Standardized hours ensure a large pool of buyers and sellers are active simultaneously. This concentration facilitates tighter bid-ask spreads, allowing investors to enter and exit positions at more favorable prices. The Options Clearing Corporation (OCC) plays a significant role in maintaining these structured trading periods, guaranteeing options transactions. While most equity and ETF options adhere to these hours, some index options may trade for an additional 15 minutes, extending until 4:15 PM ET.
Understanding Extended-Hours Trading
Extended-hours trading encompasses sessions outside the standard 9:30 AM to 4:00 PM ET timeframe, including premarket and after-hours periods. Premarket trading typically occurs from 4:00 AM to 9:30 AM ET, while after-hours trading generally runs from 4:00 PM to 8:00 PM ET. These sessions allow investors to react to news and events released outside of regular market hours.
Extended-hours trading is characterized by lower trading volume and reduced liquidity compared to regular market hours. This lower liquidity can lead to wider bid-ask spreads, meaning a larger difference between the price a buyer is willing to pay and a seller is willing to accept. Prices during these periods can be more volatile, and there is no guarantee an order will be fully executed or executed at the desired price. Most brokers also limit orders during extended hours to limit orders, preventing market orders that might execute at an unfavorable price due to volatility.
Reasons for Options Trading Hour Limitations
Options are complex financial instruments whose value is highly sensitive to factors like the price of the underlying asset, its volatility, and time remaining until expiration. Options pricing models rely heavily on real-time market data and robust liquidity in the underlying asset. The reduced liquidity and increased volatility during extended-hours trading for underlying assets can lead to unreliable option pricing, making it difficult to determine fair value.
The unique structure of options contracts and their settlement processes necessitate a highly liquid and regulated environment, primarily available during regular trading hours. The Options Clearing Corporation (OCC) acts as the central counterparty for U.S. exchange-listed options trades, guaranteeing performance and mitigating counterparty risk. The OCC’s centralized clearing and settlement process is optimized for the predictable flow and higher volume of standard market hours. The absence of market makers, who provide continuous quotes and liquidity during regular hours, further contributes to the challenges of trading options outside of standard times. Brokers generally do not permit options trading in extended hours due to these complexities and risks.
Types of Securities Traded in Extended Hours
While options are restricted to standard market hours, other types of securities can be traded in extended sessions. Common stocks and Exchange Traded Funds (ETFs) are the primary securities investors can buy and sell during premarket and after-hours periods. These securities have a simpler structure, making them more amenable to extended-hours trading compared to options. Their valuation is less dependent on complex, real-time pricing models.
Extended-hours trading for stocks and ETFs presents different characteristics than regular hours. Liquidity can be lower, and bid-ask spreads wider. This can lead to increased price volatility and a higher risk of an order not being filled or being filled at an unexpected price. Despite these differences, extended hours offer investors the flexibility to react quickly to corporate announcements or economic news released outside of regular trading times.