Evaluating Pre- and Post-Market Opening Calculations; A Real-Life Example with The Simply Good Foods Company: (Nasdaq: SMPL) – October 31, 2022
Preparing for our initial covered call writing and cash-secured put trades starts pre-market. After developing a watchlist of eligible securities, we turn to the option-chains to determine if initial time-value returns align with our stated goals. Market-makers will be a bit hesitant to publish bid-ask spreads that are in our best interest until they can determine market direction and flow. Therefore, the calculations we run pre-market will typically be different after the market opens than prior to traditional trading hours. Although different, they will usually be “in the same ballpark”, so this exercise is useful and timesaving. I recommend entering initial trades between the hours of 11 AM ET and 3 PM ET to avoid early morning and late afternoon institutional computerized trading. This article will highlight statistics taken prior to market open on 4/25/2022 and at 13:30 PM ET on that same day using The Simply Good Foods Company (Nasdaq: SMPL).
SMPL pre-market calculations using the BCI Trade Management Calculator (trading at $42.25)
- Brown cells: $40.00 ITM strike (initial return 1.88%, 26.32% annualized, 5.33% downside protection)
- Green cells: $45.00 OTM strike (initial return 1.30%, 18.27% annualized, 6.51% upside potential)
SMPL post-market opening calculations using the BCI Trade management Calculator (trading at $41.91)
- Brown cells: $40.00 ITM strike (initial return 2.35%, 32.00% annualized, 4.56% downside protection)
- Green cells: $45.00 OTM strike (initial return 1.43%, 20.10 annualized, 7.37% annualized)
Comparison spreadsheet
- The post-opening 26-day and annualized returns were higher for both the ITM and OTM strikes
- The downside protection for the ITM strike was lower for the post-opening calculations
- The upside potential was higher for the post-opening OTM strike
Discussion
Pre-market calculations are useful preliminary exercises when creating our trade structuring decisions. Final decisions are made during normal market trading hours when option pricing and bid-ask spreads provide the highest degree of accuracy.
Author: Alan Ellman