Can You Trade Options After Hours? The Risks and Rewards

*Written by AI, Edited by Humans

Trading options after hours is a practice that allows traders to buy and sell options contracts outside of the standard trading sessions. This article will explore the intricacies, risks, and rewards of after-hours options trading. Whether you’re a seasoned trader or a beginner, understanding the nuances of this trading strategy can be a game-changer.

What is Options Trading?

Options trading is a financial strategy that involves buying and selling contracts that give you the right, but not the obligation, to buy or sell an asset at a predetermined price within a specific time frame. In my years of trading and teaching, I’ve seen options trading offer a unique blend of flexibility and risk management. It’s a versatile way to play the market, whether you’re looking to hedge your portfolio or speculate on stock prices.

What Is After-Hours Trading?

After-hours trading refers to the buying and selling of securities outside the standard trading sessions of the stock exchanges. Typically, after-hours trading occurs between 4:00 PM and 8:00 PM ET. It’s a different beast compared to regular trading hours, with its own set of rules and risks. I’ve always told my students that trading after hours is like playing in the big leagues — you’ve got to know what you’re doing.

The Late Shift: Can You Trade Options After Hours?

Trading options after hours isn’t for the faint of heart. It’s a specialized form of trading that happens outside the standard trading sessions of the NYSE and Nasdaq. The opportunity for profits is there, but so are the risks. The stock market is a different beast after the closing bell, and the trading volume is significantly lower. You’re not just dealing with shares of stocks; you’re navigating a world of call options, futures, and ETFs. 

Brokerages like Robinhood offer after-hours trading, but it’s crucial to understand the laws and regulations that govern these trades. The information you’ll find in articles and data feeds can be your best friend or worst enemy. Always remember, you’re not just an investor; you’re a player in a high-stakes game where the rules can change after hours.

If you want fewer limitations, trade during the day. To get the full scoop on the basics, rules, and strategies of day trading options, check out this comprehensive guide on how to day trade options.

What Is After-Hours Options Trading?

After-hours options trading is the act of buying and selling options contracts outside of the standard trading sessions. It’s a specialized form of trading that offers both opportunities and risks. The ability to trade after hours can be a double-edged sword, offering the chance for gains but also exposing you to higher volatility.

Can Anybody Do It?

Technically, yes. Most brokerage accounts like TD Ameritrade and Charles Schwab offer after-hours trading services. However, it’s crucial to understand the regulations and policies that govern this type of trading. FINRA has specific rules, and not all trading platforms or brokers offer the same after-hours services.

The Benefits of Option After-Hours Trading

After-hours trading offers several advantages, such as access to foreign markets and the ability to respond to after-hours news events and earnings reports. It also provides flexibility in setting your trading schedule and the chance for better pricing opportunities. But remember, with greater opportunities come greater risks.

The Risks of After-Hours Trading

The primary risks include low liquidity, the limitation to limit orders only, and increased competition against professionals. There’s also more price volatility and uncertainty involved. I’ve seen traders get burned because they didn’t fully grasp the nature of after-hours trading.

These risks are amplified when dealing with options. The market dynamics change, and you’re not just dealing with stock prices but also option premiums, strike prices, and expiration dates. For a deep dive into the risks and rewards of trading options after hours, don’t miss this detailed article.

Should You Do It?

The bottom line is, after-hours options trading isn’t for everyone. It requires a deep understanding of market dynamics and a solid risk management strategy. If you’re a beginner, I’d recommend gaining more experience during regular trading hours before diving into the after-hours scene.

Understanding Order Types in After-Hours Trading

In after-hours trading, the types of orders you can place are limited. You’re generally restricted to limit orders, which means you set the price at which you’re willing to buy or sell. The trading venues are different, and the spreads can be wider, affecting the value and range of your investments. 

It’s not just about picking the right assets; it’s about understanding the mechanics of the trade, from the bid to the closing price. You’re dealing with a variety of factors, from market conditions to tax implications. And let’s not forget, you’re doing all this on a computer or laptop, often without the resources you might have during regular trading hours. It’s a different world, and it’s your responsibility to understand it.

Limit Orders

In after-hours trading, you’re generally restricted to using limit orders. This means you set the maximum price you’re willing to pay when buying or the minimum you’re willing to accept when selling. It’s a way to have some control over the price, but there’s no guarantee of execution.

Good for Day and Good ’til Canceled

These are types of limit orders that specify how long the order will remain open. “Good for Day” means the order will expire if not executed by the end of the trading day. “Good ’til Canceled” will remain open until you decide to cancel it or it gets executed.

Stop-Loss Orders and Trailing Stop Orders

These types of orders are generally not allowed in after-hours trading. They’re designed to limit losses, but due to the volatility and lower liquidity in after-hours trading, they’re not as effective.

Orders That Are Not Allowed in After-Hours Option Trading

Certain types of orders, like market orders, are typically not allowed because of the risks associated with the lower liquidity and higher price volatility in after-hours trading.

How To Get Started with After-Hours Options Trading

Getting started with after-hours options trading involves more than just having a brokerage account. You’ll need to understand the specific rules and regulations that apply, as well as the types of orders you can and cannot place. I’ve always advised my students to start with a solid trading strategy and to make sure they understand the risks involved.

Getting started with after-hours options trading isn’t just about knowing the rules; it’s about spotting unusual activity that could signal profitable trades. This is where tools and data feeds come into play. 

To understand how to trade unusual options activity, read this informative guide.

Specifics About After-Hours Options Trading

After-hours options trading isn’t as straightforward as standard market hours trading. It’s a different beast, with its own set of rules and nuances. For instance, not all brokerages offer this service, and those that do often have specific requirements. You’ll need to understand the ins and outs of pre-market and after-hours trading sessions, as well as how to access extended hours market data. Investors often engage in after-hours trading for various reasons, including responding to news events or earnings reports. But remember, this isn’t a playground for everyone; it’s often best suited for experienced traders.

What Brokers Offer After-Hours Trading?

Not all brokers offer after-hours trading. Companies like TD Ameritrade and Charles Schwab do, but others might not. Always check the services offered by your brokerage.

Understanding Pre-Market and After-Hours Trading

Pre-market and after-hours trading are both forms of trading outside of standard hours. They offer the ability to react to news events and earnings reports that occur outside of regular trading hours. However, they come with their own set of risks and should be approached with caution.

Key Takeaways

After-hours options trading offers a unique set of opportunities and risks. It’s not for everyone, but for those who understand the intricacies, it can be a profitable venture. Always do your research, understand the rules, and never stop learning.

There are a ton of ways to build day trading careers… But all of them start with the basics.

Before you even think about becoming profitable, you’ll need to build a solid foundation. That’s what I help my students do every day — scanning the market, outlining trading plans, and answering any questions that come up.

You can check out the NO-COST webinar here for a closer look at how profitable traders go about preparing for the trading day!

Do you trade options after-hours? Let me know in the comments!

FAQs

What Are the Exceptions to Trading Options After Hours?

When it comes to trading options after hours, not all options are created equal. While some ETF options like SPY, UVXY, EEM, XLB, IWM, DBB, IWO, QQQ, UNG, DIA, XRT, XLU, XLK, XLF, and XLE might be available for after-hours trading, it’s essential to check with your brokerage. Platforms often have specific lists of options that can be traded outside of standard market hours. Always consult BrokerCheck to ensure you’re dealing with a reputable brokerage that adheres to FINRA regulations. 

How Does After-Hours Trading Differ from Regular Trading?

The main differences include lower liquidity, higher volatility, and the types of orders you can place. It’s a more specialized form of trading that requires a deep understanding of market dynamics.

Is After-Hours Trading Available on All Platforms?

No, not all trading platforms offer after-hours trading. Always check with your brokerage to see if this service is available and understand the rules that apply.

How Do Taxes Affect After-Hours Trading?

Taxes are a crucial factor to consider in any trading strategy, including after-hours trading. The IRS has specific regulations and laws concerning the taxation of profits and losses in these trades. Always consult with a tax advisor to understand your responsibilities.

Is After-Hours Trading Available on All Trading Venues?

No, after-hours trading is not available on all trading venues. Major exchanges like the NYSE and NASDAQ offer it, but some OTC markets and smaller venues may not. Always check the specifics of the trading platform you’re using.

How Secure Are My Investments During After-Hours Trading?

Security is a concern, especially when trading after hours. While FDIC insurance covers some aspects of your brokerage account, it doesn’t protect against losses in your positions. Make sure you understand the risks and have a solid risk management strategy in place.

Can I Use Credit Cards to Fund My After-Hours Trades?

While some brokerages allow the use of credit cards for funding accounts, it’s generally not recommended due to the high fees and risks associated with trading on borrowed money. Always exercise caution and understand the terms before using credit cards for trading purposes.

What Is the Difference Between Day Trading and Trading Equity After Hours?

Day trading involves making multiple transactions during regular market hours, while trading equity after hours is executed during the time period after the market’s official close and before its opening. Both activities involve transactions but carry different risks and potential rewards.

Where Can I Find Articles and Content on After-Hours Trading?

If you’re looking for articles and content on after-hours trading, quotes and definitions related to it can usually be found on LinkedIn or in finance-focused publications. There are multiple resources available to provide in-depth analysis and information.

How Do Companies and Customers Benefit from After-Hours Trading?

Companies may see a rise in their equity value after hours based on news or financial reports. Customers or individual persons might use this opportunity to get ahead of the general market’s response. However, the seller also faces increased risks, like lower liquidity.

Can I Trade Different Types of Assets After Hours?

Yes, aside from equity like Apple’s stock, you can also trade other assets like crypto or financial instruments such as Exchange-Traded Funds (EFA). However, it’s crucial to note that commissions may apply depending on the trading platform you’re using.

Is After-Hours Trading Suitable for Beginners?

After-hours trading carries a certain level of risk and complexity that may not be ideal for beginners. It is advisable to take some trading courses and understand the situation and reason behind after-hours trading before diving in.

What Time Zones Affect After-Hours Trading?

After-hours trading is influenced by different time zones, especially when it comes to international markets. Investors should keep an eye on world events and times in different regions to make well-informed decisions.

What Kind of Products Can Be Traded After Hours?

Various products can be traded after-hours, including equity in a company, Exchange-Traded Funds (ETFs), and even certain types of commodities. Cash accounts can also participate, but they have certain restrictions compared to margin accounts.

What’s the Role of Communication Networks in After-Hours Trading?

Communication networks, often known as Electronic Communication Networks (ECNs), play a critical part in after-hours trading. They match buy and sell orders from different people at the best possible price points, facilitating transactions when traditional markets are closed.

How Do Biographical Events Impact After-Hours Trading?

Biographical events related to a company’s executives or key figures can dramatically influence trading after hours. In such cases, investors often make decisions based on the newly released bio information, affecting both the equity value and investor sentiment.

Is There a Point to Use Limit Orders in After-Hours Trading?

Yes, in fact, using limit orders is highly recommended in after-hours trading to mitigate risk. These orders specify the highest price you’re willing to pay as a buyer or the lowest price at which you’re willing to sell, giving you a better hand in controlling your trades.

What Part of Your Portfolio Should Be Dedicated to After-Hours Trading?

None… jk! The part of your portfolio allocated to after-hours trading should be determined based on your risk tolerance, investment goals, and market expertise. It’s generally not advised to commit a large portion of your portfolio to high-risk activities like after-hours trading unless you are very experienced.