What's this?

If you don't know what this is and you trade SPX-related options trades, you'd better learn what it is. It's an intraday chart of the /ES, the e-mini S&P 500 futures contract, showing the extended-hours trading session in the highlighted vertical bands. As you can see, quite a lot can happen during those extended hours sessions while our futures react to overnight developments in global markets as well as to before-the-market releases here in the U.S.

What does this have to do with you if you're trading SPX options?

You know how you wake up some morning and the SPX futures are way up or way down, and you know the SPX is going to gap at the open? Your SPX-related options trade will be impacted. However, there's nothing you can do about it until the options market opens unless you're knowledgeable enough and willing to trade futures to hedge against a big move. Well, I have good news and bad news to present.

VIX and SPX option hours are going to be expanded to a 2:00 am CT Chicago opening, according to this CBOE accouncement. Beginning Monday, March 9, 2015, options for both the "SPX and SPXW (SPX Weeklys and SPX End-of-Month)" options will be traded in extended trading hours from 2:00 am to 8:15 am CT and regular trading hours from 8:30 am to 3:15 pm CT, according to the announcement. VIX options will also be treated to the same new extended trading hour schedule, a week earlier on Monday, March 2.

What does that mean for those readers who trade SPX-related options positions? I don't know yet. That depends.

On what does it depend? First, it depends on whether you'll be awake or have the capability to set contingent orders that will fire when you're not awake. And then it depends on whether you want to do that.

A Theoretical SPX Iron Condor Established on Friday, Feb 20:

The arrow indicates the price point at which I would probably have made an adjustment on my iron condor when I was trading them. That arrow indicates the price point at which the delta on the sold 2220 calls would be -16. That would occur roughly at about 2139 as the day was ending on Friday, February 20. With a three-day weekend passing and the typical amateur-hour shenanigans at Tuesday's opening, I couldn't have been as confident of the price point during amateur hour Tuesday morning, when markets opened again. I would have been even less confident of where that delta would have reached -16 during a 2:00 am - 8:15 am extended-hours session Tuesday morning, if those options had been trading then. However, if my platform allowed me to set up contingent orders based on the delta of the option, and if it had been possible to trade SPX options during the extended period, I could have set such contingent orders. Would my order have filled? I don't know. How much volume will there be? How far off the mark or mid-price would I have to go to get a fill in such market conditions?

When March 9 rolls around, traders would presumably be able to do just that if their platforms allow contingent trades to be set up based on the deltas of certain options. Or, if their platforms don't allow such contingent orders, they could perhaps calculate the futures price they thought roughly equivalent to the SPX 1239 price point and set the contingent order based on the futures' level, if their platforms allowed that kind of contingent order.

That's the good news. Options traders might now have some protection against huge overnight moves.

That's also the bad news. I tried trading currencies one time. Currency markets are open in the wee hours of the morning. I got used to sleeping with the computer on the bedside table. Or rather, I got used to not sleeping since the computer was on the bedside table.

Let's think about that "amateur hour" comment I just made, though. Why is the first hour of live trading sometimes called "amateur hour"? Action can be wonky as big money reshuffles their positions and reins in risk. Pricing can be wonky, too. There may be a knee-jerk reaction to the behavior of foreign markets, sometimes a knee-jerk reaction that is soon reversed.

Cash SPX Friday morning, February 20:

If a trader had made some sort of adjustment to ameliorate downside risk in the wee hours of that Friday morning depicted in this graph, that trader probably would have regretted that decision after the live markets opened. The SPX took off to the upside after the first 30-minute bar printed.

The point of early trading on such a day after overnight weakness is to determine whether selling will be met by waiting buyers snapping up sold stock, waiting sellers unloading on every bounce or equally weighted buyers and sellers that reach a stalemate. The lower volume during futures' trading overnight can push futures all over the place, but there may not be follow-through to such action beyond a first knee-jerk reaction. We just don't know.

Will it be wise to adjust SPX-related options positions in that ETH session before the cash market opens, either by setting alerts and waking up to trade or setting contingent orders that fire automatically? I don't know. I personally don't think we'll know for sure until we see how it all shakes out. Perhaps the ability to trade options during that extended trading hours period and hedge risk will smooth out some of the early morning gapping behavior that has become more prevalent in the recent years. Perhaps we'll find that trading that overnight session can occasionally prove extremely helpful but mostly prove so volatile that it chops through too much potential profit and leads to overtrading.

For now, be aware that your March and later expiration SPX-related trades may be impacted in ways that we can't yet predict. If you're tempted to adjust an open trade during the ETH period, try to make that adjustment as minimal as possible. If you're tempted to speculate during that period, remember that low volume may complicate your ability to enter or exit trades and may increase bid/ask spreads and lead to more slippage than usual.

This may be the greatest boon yet to the option trader who has gotten caught in one too many early morning gaps. This may put income-type trades and speculative trades alike in more danger or less danger. Be cautious until we know which way it works out.

Linda Piazza