Many professional traders trade actively in the first hour or two of trading and take the middle of the day off. This is the best time of the day for trading options for experienced and skillful traders. They may come back for the last hour or two of trading. This is because the biggest swings in the market occur at the start and end of the trading day. This especially important for those option traders who take sniper shots at the short up and down swings in the market. While a trader may stick around to watch a trade, he or she will commonly not see much tradable action until the hour or so before the close of the market.
Why Is the Market More Volatile at the Open and the Close?
When the market opens in the morning, all of the news and events since the previous close are there to drive stock prices. Automated trading bots can create sharp and brief spikes in prices. Many times this is when having traded the rumor a trader will then trade the news. This often means they will have a trade in place that profits when the market corrects on the news. This is the time of day when skilled professionals make most of their profits. It is the time of day when novices commonly lose money.
Middle of the Day Trading
Once of pent up energy of the market has dissipated after the first hour or so of trading the market settles down. Market moves tend to be less and trading volume falls. Only when there is important news in the middle of the day is there typically much action. One event that happens at this time is a Federal Reserve announcement of interest rates. When these occur the market can rocket up or plunge down dramatically or both. For the minutes after a Fed announcement and while the Fed Chair speaks trading can look like that of the early morning. When this is particularly active it can continue into the last hour of trading without a break.
Premarket and Early Day Trading
Some traders start an hour before the market opens in the premarket trading index futures like S&P 500 E-Minis or ETFS that track the S&P 500. The premarket can be similarly active like the first market hour because of pent up news and events. Just like with the first hour in the market this is a time when skilled professionals make money and novices commonly lose.
End of the Day Options Trading
Day traders always want to close out their positions before the closing bell. This can lead to wild market swings as those who are losing money pare their losses and others seek to profit from the wild action. There are times when the market day ends with either a sharp rally right up to the end or a sharp decline to the final bell. Options traders can enter traders meant to profit from overreaction at the close as the next day the market may well correct from the panic at the previous close.
When there is a triple witching day this greatly accentuates the volume and volatility of trading during the last hour of the trading day.
Long Term Versus Short Term Traders
Traders who are good at sniper shots and reacting quickly to market changes can thrive by trading early and late in the day. They can often go away in the middle of the day. Those who are better at longer term trades often prefer to stay away from the volatility of early and late trading and let market fundamentals generate their profits for them as their stocks go up or down over days, weeks, or months. At Top Gun Options we profit from sniper shots and from very long-term trades like long synthetic stock positions on Amazon. When the market is volatile it is best to trade with a dedicated squadron like at Top Gun Options where we potentially make money in all markets and at all times.
