Image source: Pexels

A common question many new traders have is do options trade after hours? The short answer is: with a few notable exceptions, no. But to really address the question, we have to first determine what “after hours” means.

Stocks and options are traded in a marketplace called an exchange. There are various exchanges across the globe, each with their own set of trading hours, but mostly conforming to three “major” sets of trading hours referred to as a “trading session:" US/Americas, Europe, and Asia.

US/Americas exchanges are from 9:30 a.m. – 4:00 p.m. US Eastern time. Trading is traditionally Monday through Friday within these hours, meaning that there are only two hours during the weekday where trading is generally not done: 8:30 a.m. – 9:30 a.m. and 4:00 p.m. – 5:00 p.m. It is important to note that certain exchanges may be closed for all or part of a normal trading session based on holidays (and Asian exchanges often close during their lunch hours).

In order to trade at an exchange, you have to go through a broker or brokerage firm. The hours that are “during market” will be dependent upon the broker and the exchange to which they connect you. All times outside those specific hours, whether they come before the open or after the close, are considered “after hours."

While some exchanges may allow you to trade securities after hours, the trading of options is closed. As mentioned earlier, there are a few notable exceptions: ETFs (exchange traded funds), such as SPY and QQQ, are the most common examples in the US/Americas exchanges. They are often traded for an additional 15 minutes after the closing bell, but are settled (at expiration) based off the price of the underlying at the close. (Note that options on their expiration day may stop trading with the normal trading session.)

Perhaps, rather than simply, “Do options trade after hours?”, a more pertinent question would be: “Are there any risks for holding options through expiration?” And the answer, somewhat surprisingly, is yes.

As an options trader, you may buy and/or sell options on an underlying in the hopes that it will move in your desired direction by expiration. If you hold your options through expiration, you run the risk of automatic exercise or assignment. In and of itself, this seems fairly straightforward: if your option is in-the-money (ITM) at expiration with an option you bought, it makes sense that you’d want to exercise that option to gain the benefit of being ITM.

Likewise, if you sold an option and it expired ITM, you’d expect to get assigned. However, this isn’t always the case. As we’ve discussed, trading of options stops with the normal trading session, but it’s still oftentimes possible to trade the underlying securities well after the closing bell. This can cause unexpected behavior because the trading for options ends before they actually expire.

Ignoring any weekly or intraweek options, “standard” (monthly) options expire the third Friday of the month – though technically, this is inaccurate. They stop trading the third Friday of the month, but they actually expire by noon the following day.

Because it’s possible to still trade securities after the market closes for options, there is a risk that the security will trade through the strike, making an option that closed ITM suddenly out-of-the-money (OTM), or vice-versa. This could result in unexpected assignment, or the lack of an expected assignment.

In most cases, the moves after hours are not enough to change the expected behavior. However, be aware – especially if you are short (have sold) any options – you may be assigned the security even though the option was OTM when you last were able to trade it.

The more volatile the move of the underlying and the closer the price is to your strike at the closing bell, the greater the chance of a “surprise” event. Therefore, to avoid any surprises, it is best practice to close any positions with prior to the closing bell of the last trading day before expiration.

So, do options trade after hours? In a word, no. However, that doesn’t mean that you need only concern yourself with the prices of the underlying between the opening and closing bells. Binary events, such as earnings announcements or other news reports, often happen after trading has closed for the day on options.

Many of you may trade options specifically around those events in order to try to capitalize on such movements when options aren’t being traded. But specifically, as it relates to the expiration, you need to be mindful of what the potential risks are – and if you’re not comfortable with them, be sure to close/exit the position before the closing bell on expiration day.