Mind the Gaps When Trading Options


This market remains a volatile beast, gapping higher or lower practically every session. We are also almost through another round of quarterly earnings, which always seem to create potential for large gaps. I think many of us can agree that the first 30 minutes of the market can be very volatile because of a volatility event or from an earnings report. If you have been watching the market over the past couple of months, you might say the entire sessions have been volatile. But by being patient, and many times sitting out early market action, you can improve your chances for success later in the session.

There is an old technical analysis saying that says gaps tend to fill. Of course, that is true sometimes but not true other times. That said, the market and stocks tend to be more volatile at the open than later in the session. Although technical analysis like support and resistance levels still tend to work, erratic movements are present more so than later in the session. I like to tell traders to let the market settle and simmer and then look for an edge.

So, remember: Be patient and wait to see how early trading develops. Give some previous support and resistance levels a chance to respond to try and get a better feel of which way (if any) the market will move after the initial open. Then if you get a 2-bar close, for example, on whatever time frame you are using below support or above resistance or a reversal off those levels, you have put the odds are your side. And that is a very good thing!

John Kmiecik

Senior Options Instructor Market Taker Mentoring, Inc.

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