The markets have official hours when most trading takes place during the day but some stocks also trade in after-hours or pre-market hours. Stock prices will change for a given stock when new information is released and these releases commonly take place during after or pre -market hours, which makes these time periods very interesting to short term traders. It would seem that the ability to trade during these hours would be an advantage – or is it?
[VIDEO] Premarket Trading
Although it is possible to make stock trades in the pre-market or after-market hours it may not really be an advantage. First, volume is very low during these periods, which drives the spread up and usually commissions are much higher for these trades. Second, price gaps are just as likely to occur in the pre and after-market hours as they are during the normal trading day.
Often new traders assume that since gaps most commonly occur between one day’s close price and the next day’s open price that traders during those periods could trade inside the gap. However, that is usually not the case. These gaps are particularly dramatic during earnings announcements, which means that every earnings season we get a lot of questions about how to trade during off hours.
For example, the stock Acuity (AYI) released earnings before the market opened today. The news was a disappointment and the stock opened a dollar lower than it closed yesterday. A new trader may assume that if they had shorted the stock in the pre-market hours they could have profited from some of that movement but the gap was probably immediate.
In order to make a market for a particular stock, buyers and sellers have to agree to the price. When information like earnings is released, both buyers and sellers know what the news is at the same time. In the case of AYI the news was not good and buyers were immediately willing to pay less for the stock than they were seconds before the news release.
There is no requirement for a stock to move from one price point to the next in increments of a penny. A stock’s price can gap immediately to a new price even if it is several dollars away from the last trade price. Having access to pre-market trading would not have given you an advantage or edge with AYI.
Unfortunately there are very few things that provide a true ‘edge’ for short term traders. Trading during off hours is usually a good way to increase your costs and risk because of low liquidity. However, if you are inclined to speculate on earnings or news a popular strategy is option straddles and strangles.
Image courtesy robstephaustralia.