“How Wayne Gets Things Done”

The fourth question from Bill was “When is the Best Day or Condition?” His fourth question is probably the most difficult question to answer. The reason it is difficult is that no one knows what tomorrow may bring, so what looks good today may not be sweet tomorrow. However, I will take a shot at “If I’ve noticed certain days or conditions that work best for executing strategies.”

Some General Principles

It is important to realize that the dollars you will receive from selling a covered call option contract or from buying a cash-covered “put” option is related to the nature of your contract. The closer the expiration date of the contract, the fewer dollars anyone will be willing to pay you for the contract. Therefore, for options that will expire on Friday, it is generally true that trading options on Mondays are best. The reason is simple: the five days before the contract expires can change the price/share dramatically. The closer you are to the expiration date, the less likely the contract will appeal to buyers.

Therefore, for stocks and ETFs that have weekly options, the best day to trade if you are looking at Friday’s options is Monday. However, if today is Friday, and you are looking at next week Friday, then you might want to do the trade if the shares are moving up on the current Friday.

If the stock or ETF only has monthly options, I don’t believe there is a best day for trading. For example, if the next third Friday is September 19, and today is August 15, then there is a month until the option expires or is called. Therefore, just about any day is a good day to trade a covered call. Keep one thing in mind, however. It is best to do the trade on a day when the share price is going up. The enthusiasm works in your favor for the dollars you might receive from selling the covered call option.

While there is no perfect time of day for entering an option contract, I have found that early in the morning (9-10 AM) and late in the afternoon (2-3 PM) are often the best hours to enter an option trade. There appears to be more enthusiasm (or fear) at the outset of the trading day and as the day is winding down. That does not mean that I avoid trading after 10 AM and before 2 PM. However, I have found the best opportunities during those hours. Here is an interesting graphic from Investopedia: Investopedia Link

The ”Probability Above” Factor

One key to selling a covered call option that will earn income and yet likely not have your shares called is to avoid greed. Greed shows up by trying to earn too many dollars on the contract at the expense of losing your investment (100 shares per contract could disappear from your account). Therefore, using Fidelity’s Active Trader Pro “Trade Armor” I am able to see a calculated probability.

In the following example, I have 100 shares of ABBV with a contract price of $200 that expires today. There is a possibility that today’s closing price will be above $200. Therefore, if I want to keep my shares, the best time to roll the contract to a higher price is today. If I roll the contract up from $200 to $205, I will have to extend the contract to September 12. The probability that the share will reach $205 is, therefore, 38.42%.

Is it worth it? I believe so. I can increase my profit by $5 per share and gain an additional $70 in option income. Then, as September 12 approaches, I can reevaluate the contract and perhaps roll it higher or lower. The next Ex-Dividend Date won’t be until mid-October, so I will have time to adjust the option contract price before then. The next earnings date isn’t until October 28th.

The Risk of Friday and Monday Trades

What is true of buying and selling stocks or ETFs is also true of buying and selling options. If you enter the trade on Friday, remember that the world can change dramatically due to events on Saturday and/or Sunday. That can make the Monday market shoot up or come crashing down as a result of the weekend news. Some of you will remember “Black Monday.” There was a world stock market crash on Monday, October 19, 1987.

“The Dow Jones Industrial Average (DJIA) lost 22.6% in a single day. The event marked the beginning of a global stock market decline, and Black Monday became one of the most notorious days in financial history. The S&P 500 lost even more than the Dow Jones with a 30% loss on the day.” – Investopedia

While this was a rare event, it can create a real mess if you enter orders on Friday.

See this Investopedia article: Best Times of the Day, Week, and Month to Trade Stocks

Recommendation: Options For Investing Doers

I think the timing of your orders is of less importance than the decision process. I don’t look at any individual day as a “bad” day to do a trade unless it is just before the earnings date or the option expires close to the Ex-Dividend Date. Rather, build a discipline that looks at the data rather than the day. Look at the price movement rather than the month.

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