Be wary of after-hours trading. The price can be a false representation of what the “real” stock market thinks of the stock.
I have often said as an options trader, as well as a mentor in the online trading education realm, that you should be wary of price action in the after-hours market. This is not only true due to the fact that the options market where I thrive doesn’t trade after hours, but also because of the unreliability of after-hours direction. How many times have you seen a stock announce earnings, and the after-hours market moves the stock lower, only to see the stock move bullish the next day? There are far too few players in the after-hours stock market. This lack of liquidity not only makes it a dangerous place to try and place winning trades, but also opens you up to the manipulation of other traders. Let me give you the most recent example:
Last night after the closing bell Nvidia (NVDA) announced what appeared to be a solid earnings report. The after-hours market however, decided to sell the stock. The stock was off over $1.00 from its closing price of $23.38. Even at the open this morning, there was still a little pessimism in the name with the stock opening at $22.73, down $.65. However, once the market started to trade this morning buyers started to pick the name up. I am writing this about 20 minutes before the close and NVDA is currently $25.99. That is an increase of 11.2%.
Now, had I adjusted my trade in the earlier going this morning because of a perception that the stock was going lower, I’d be in a bad trade. Whether that was selling calls against my stock or buying puts to protect my investment, I would not be happy with the result a few hours later as the stock has rallied today on the heels of that great earnings report. Waiting to see what the market does in regular trading hours is essential to decide what the “real” market reaction to an earnings report might be.
Some say that to invest successfully you need a crystal ball to see into the future. I say you just need practice in solid investment training, patience and a disciplined approach on how to invest. You will get some picks wrong from time to time. The options trading tools and the knowledge of trade adjustments will help you get more consistency and profitability in any market condition.
OptionsANIMAL Founder and CEO