What often happens about 12:45 CT in the markets? Let's look at an example as shown by an arrow on the following graph. Remember that this graph does not show current prices.

About 12:45 pm CT on the RUT on June 6, 2014:

That day, the RUT had jumped more than a standard deviation in the first few minutes of trading, the day after a 2.09-standard deviation move. Then the RUT had pulled back from the day's high, forming a triangle near that high. What would happen next?

I thought we might begin to see the "what would happen next" sometime around 12:45 pm CT. I first noticed some peculiar and repeated market behavior about that time way back about in the year 2000. I was an active day trader, and my broker was a traditional broker, the kind you called on the telephone in order to place an order. I live in Texas. I found that I was often trying to locate him by phone about 12:45 pm CT to close a trade, either to lock in a suddenly hit profit or to exit in order to keep losses from mounting. He might be in a meeting, but, often, he was at lunch. I would have to find the on-duty broker and get the order handled. By that time, strangely enough, the underlying had often reversed from the move that had prompted my call. Hmm. That happened over and over. In Texas, people take their lunch hours beginning at about noon and return about 1:00 pm CT, but did Wall Street guys do that? Not if we were to believe all the old movies about Wall Street types and their two-hour martini lunches. We believe everything we see on television, right?

But, what if floor traders--there were more of them then--and big-money people were just returning from their lunches a few minutes before 1:00 pm CT or 2:00 pm ET? What if, upon returning, they wanted to test the markets to determine whether a dip was bought or a gain was sold? Why not run the market up or down a bit in the early afternoon when volume was likely to be lighter than either at the open or near the close and see what happened? If I had the money to do that, I'd certainly be testing the waters.

That little arrow on the graph at the beginning of the article indicates a gap up on the RUT that occurred at 12:49 pm CT that day. I had been watching for a gap or at least a quick move up or down. I knew from experience that the gap didn't predict the direction of the markets: it would more likely be the reaction to that gap that would do the predicting.

The initial reaction on the part of market participants was to sell. That was the first bit of information, but it wasn't quite enough. I knew then to watch for a test of the bottom of the triangle. Would the RUT break down out of that triangle or would the small pullback be minimal and soon bought? Unless the RUT broke down out of that triangle, I knew it was likely that the story wasn't finished.

What happened next?

RUT Five-Minute Graph, Think-or-Swim Graph:

The first horizontal arrow shows that gap near 12:45 pm CT. The second arrow, pointing upward, shows that when the 12:45-ish bump higher was sold, prices dropped to the bottom of the triangle. However, that support held, too, so an attempt was made to break up through the top of the triangle. This occurred at the third arrow, pointing downward. Prices couldn't successfully break through the top. By this point, I decided that sellers and buyers looked about equally strong. The action looked directionless. The RUT traded into the apex of that triangle, rendering the triangle useless as a predicting tool. Although RUT prices broke down below what had been the supporting trendline, they bounced right back up again.

What does this testing about 12:45 pm CT have to do with option trading? I'm no longer a day trader employing directional trades, so why should these little signs matter to traders like me? In my case, I prefer not to make my adjustments until the end of the day, if I can wait that long, allowing me to see how prices--and Greeks--will end up. On light-volume Fridays, however, I sometimes need to begin making adjustments a bit earlier because it's sometimes hard to get fills. In my case, this action told me that I couldn't likely predict what might happen throughout the afternoon, and I just needed to make incremental adjustments in case the RUT took off one direction or another while I was in the midst of those adjustments.

A directional trader in a negative-theta trade such as a long call might have been hoping that the RUT would jump back to and above the day's high. Watching the results of that 12:45 pm-ish CT test, that trader might have concluded that it was just as well to go ahead and lock in profit rather than wait for weekend decay to accelerate as the week's close approached. Likewise, a bear who had hoped the RUT would retreat further might decide that it was just as well to go ahead and lock in the losses incurred rather than risk a jump higher in the afternoon. With bulls and bears obviously equally balanced for the moment, the chances that the RUT would barrel lower into the close seemed no more likely than that it would climb higher.

Sometimes that 12:45 pm CT period provides more information. For example, if that little gap higher had been sold more strongly, breaking RUT prices below that triangle right away with a tall red candle, and if any subsequent attempt to bounce was tepid, a short-term downturn for the early afternoon, at least, would have seemed more likely.

My trades these days are not dependent on short-term moves, but sometimes the timing of my adjustments might be influenced by them. On those days, I still watch that 12:45 pm CT action.

Linda Piazza