Ken Trester

Prices Can 'Jump' in the Night

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It's my stance to leave after-hours trading to the big dogs, but there are a few things that could help ensure get into your intended trades at a reasonable price.

First, a proposed solution has been an extension of trading hours, but since that's likely a long way off, using limit orders can help significantly in the meantime. A limit order is an order to buy or sell a security at a specific price. Using them will ensure that if you place a buy order for a trade after 4 p.m. Eastern for an option at $1, if market makers do their voodoo overnight, you won't get stuck buying the position if the option runs to $4 by the morning.

The next important rule is: Don't chase an option. If a premium runs up a nickel above our Buy Under price, an option may still be a good play, but anything over a dime above what we recommend shouldn't be pursued because it will impact the option's profit/loss picture.

If an option's price runs up and comes back in a day or two, it's generally still OK to get in. But, if it doesn't pull back in two days, it's probably not worth waiting for. If you put more on the table than is recommended, there's more of your capital to lose if all the hype is already out of the trade. Even if the trade still goes up a little bit, it's likely not worth it if it's barely covering your commission costs. The third rule is: Know thyself. There are basically two kinds of options traders. The ones who are happy to bank a successive series of small profits, perhaps 50% or so, then they cash in and move on.

Then there are those who want those 400% gains, like my subscribers saw in a Cypress Semiconductor (CY) trade.

There's nothing wrong with either option trading strategy, and sometimes you've got to do both, but no matter how quickly options are trading, you need some element of either watching the circulars for a sale price or putting in a good-till-canceled order (GTC) and maybe counting your blessings if "everyone" got in before you did.