Do Not Trade Options at the Start of the Day

Do not trade options at the begining of the day, unless you want to get a really lousy execution!

The market makers fill a valuable function by providing a bid and ask at all times during the day, but they are not going to give you anything for free. At the begining of the day, there are not a lot of public orders, so the market makers keep the bid - ask spread as wide as possible. To illustrate, here are the quotes on the CME November 320 call for the past few days:

October 19, 2009

Time Bid Ask Spread
9:40 11.20 12.10 0.90
9:41 12.10 12.70 0.60
9:42 12.10 12.60 0.50
9:45 11.60 12.10 0.50
9:46 11.60 12.30 0.70

After 10:00, the spread for this option is generally $0.40 or less.

Here are the numbers for October 20, 2009

Time Bid Ask Spread
9:30 13.00 14.20 1.20
9:31 13.50 13.90 0.40
9:33 13.10 13.80 0.70
9:34 13.10 13.80 0.70
9:35 13.70 14.50 0.80
9:36 13.70 14.60 0.90
9:37 13.50 14.30 0.80

By 9:50 the options were trading with a 0.40 spread between the bid and ask.

I have tracked this for several more days, with similar results, and I have noticed this in other options besides the CME's. So be warned, trading options in the first ten to twenty minutes is really tricky. Entering a market order at this time is insane. Do not do it. If you put a limit order in between the bid and ask, you can be assured of getting an execution only if the underlying stock moves in a way that is bad for your order. If you try to buy calls and the stock moves down, the market makers will pick your order off so fast your head will spin. Otherwise, good luck getting an execution!

Just remember, the market maker is there to fill orders, but he, like you, is looking to make a profit.