SUMMARY
This article delves into the optimal timing for stock and option purchases by analyzing the performance breakdown of after-hours and intraday trading using the S&P 500 tracking ETF (SPY). We explore the impact of market timing on investment returns, considering factors such as early morning volatility, wide spreads, and the release of news, government statistics, and corporate earnings reports. Our findings highlight the significance of after-hours trading, as well as the importance of patience and strategic decision-making in maximizing returns and minimizing risks. The article provides insights into the best days of the week for single and multiday trades, ultimately guiding investors to make more informed choices when entering and exiting positions.
When should you buy a stock or sell a PUT? First thing in the morning? Middle of the day? End of the day? Does it even matter?
The performance breakdown of after-hours and intraday trading is a remarkable statistic. By analyzing the S&P 500 tracking ETF (SPY) that began trading in 1993, we can determine how much of the index’s long-term gains have occurred outside of regular trading hours versus during regular trading hours. As experienced investors are aware, the S&P’s opening price is often different from its prior day’s closing price. This is due to the futures market that operates outside of regular trading hours and affects index levels. Positive or negative news that occurs outside of regular trading hours, as well as after-hours ETF trading, are reflected in S&P futures prices. When SPY begins trading at 9:30 AM Eastern Time, it will “gap higher” to reflect pre-market trading levels. Conversely, if negative news has S&P futures trading lower after hours, SPY will “gap down” and open lower at 9:30 AM.
The initial “gap” that occurs between the prior day’s official closing price and the current day’s official opening price represents the “After Hours” trade. In contrast, the change in price from the official opening price at 9:30 AM to the official closing price at 4 PM represents the intraday, or “Regular Trading,” move. The combined moves during After Hours and Regular Trading determine the full-day change from the prior day’s close to that day’s close. The full-day change is the daily percentage move that you see quoted on financial media tools.
First thing in the morning we have no idea what the market is going to do. We have an idea, based on the futures and foreign markets, but no guarantee. The market can open high and fade during the day. The market could be down all day and surge at the end. So, when should we buy?
Investing solely in the After-Hours strategy by purchasing the close and selling at the next open would result in a substantial gain of 722%. Conversely, investing solely in the Regular Trading strategy by buying at the open and selling at the close would lead to a loss of 8.5%. Surprisingly, if an investor only owned the US stock market during regular trading hours since 1993, they would currently be facing a decline as of September 2020. This statistic highlights that more than 100% of the S&P’s gains since 1993 have actually occurred outside of regular trading hours. For those attempting to make a living through intraday trading, it is certainly a challenging task!
Early morning is also a time of high volatility and wide spreads, the difference between the “ask” and “bid” prices, what the seller wants, and what the buyer will pay. Part of the volatility is an overreaction to overnight news or news coming out of other markets, such as the Asian and European markets.
Another reason for waiting until the end of the day is that government statistics and many corporate earnings reports are released in the morning. These reports can sometimes drastically change the market, taking several hundred-point rallies to several hundred-point losses and vice-versa.
The above study was bought and sold at the subsequent open or close. What if you want to keep the stock for a week or more. Does that change what happens?
There have been several studies that have analyzed the difference in returns from buying stocks in the morning versus buying in the afternoon and holding them for at least one week.
- “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” by Barber and Odean (2001) found that individual investors who bought stocks in the morning and held them for at least one week tended to underperform those who bought in the afternoon and held for at least one week.
- “Is there a Morning Afternoon Anomaly among Individual Investors?” by Kumar, Page, and Spalt (2011) found that individual investors who bought stocks in the morning and held them for at least one week tended to underperform those who bought in the afternoon and held for at least one week. This effect was more pronounced for less liquid stocks.
- “The Trading Performance of Morning Stars” by Engelberg and Sasseville (2011) found that stocks that experienced positive news announcements in the morning tended to underperform in the subsequent week, while stocks that experienced positive news announcements in the afternoon tended to outperform in the subsequent week.
Probability Trader loves to verify the results of other researchers. I downloaded the data for the SPY from 1/2/1996 to 3/23/2023. I calculated the daily Open to Close results and the Close to-next day’s Opening. This duplicates the results of Bespoke. The Open to Close is daily results. Close to Open represents after-market activity.
- Aftermarket profit/loss = 8.66% annual rate of return (698% gain)
- During market profit/loss = -0.845% annual rate of return (-19.2% loss)
*NOTE the difference is statistically significant at the 99% level
Let’s take the Bespoke approach one step further. We are predominantly selling weekly PUTs, and we know that time will dissipate results. So, does it make any difference if we sell a PUT Monday opening vs Monday Close when we are closing the position Friday Close?
Using the same dataset as above:
| ACTION | CAGR | GAIN | WIN% |
| Buy SPY Thursday Open, Sell NEXT Friday Close (7 days) | 2.61% | 90.23% | 55.48 |
| Buy SPY Thursday Close, Sell NEXT Friday Close (7 days) | 2.94% | 106.16% | 56.86 |
| Buy SPY Friday Open, Sell NEXT Friday Close (6 days) | 3.07% | 112.83% | 55.45 |
| Buy SPY Friday Close, Sell NEXT Friday Close (6 days) | 3.23% | 121.59% | 55.00 |
| Buy SPY Monday Open, Sell Friday Close (4 days) | 3.05% | 111.68% | 53.66 |
| Buy SPY Monday Close, Sell Friday Close (4 days) | 4.18% | 178.08% | 55.20 |
| Buy SPY Tuesday Open, Sell Friday Close (3 days) | 0.66% | 17.77% | 54.18 |
| Buy SPY Tuesday Close, Sell Friday Close (3 days) | 1.08% | 30.76% | 56.49 |
| Buy SPY Wednesday Open, Sell Friday Close (2 days) | -0.23% | -5.64% | 55.17 |
| Buy SPY Wednesday Close, Sell Friday Close (2 days) | -0.74% | -16.84% | 55.10 |
| Buy SPY Thursday Open, Sell Friday Close (1 day) | -0.74% | -16.89% | 54.93 |
| Buy SPY Thursday Close, Sell Friday Close (1 day) | -0.79% | -17.98% | 52.60 |
*NOTE: none of the days are statistically significant comparing those days open or close to Friday close.
This table shows the results of different trading actions (buying and selling the SPY ETF at specific times) over different periods, as well as the corresponding Compound Annual Growth Rate (CAGR) and Gain percentage for each action.
The CAGR represents the annualized return on the investment, assuming that the same growth rate is achieved over the entire period. The Gain percentage represents the total percentage gain or loss from the initial investment.
Based on the table, we can see that buying the SPY ETF on Monday’s close and selling on the next Friday’s close (4 days) has the highest CAGR of 4.18% and the highest gain of 178.08%. Buying on Friday close and selling on the next Friday close (6 days) also shows a high CAGR of 3.23% and a gain of 121.59%.
On the other hand, buying on Wednesday open and selling on the next Friday close (2 days) shows a negative CAGR of -0.23% and a negative gain of -5.64%. Surprisingly, buying the close on Wednesday or Thursday and selling Friday Close is worse than buying the Open.
What happens daily? Monday close to Tuesday close. Tuesday close to Wednesday close, etc.
| Action | CAGR | GAIN | WIN% |
| Buy Monday close, sell Tuesday close. | 4.16% | 176.80% | 53.68 |
| Buy Tuesday close, sell Wednesday close | 2.35% | 78.80% | 56.35 |
| Buy Wednesday close, sell Thursday close | 0.34% | 8.92% | 54.50 |
| Buy Thursday close, sell Friday close | -0.80% | -18.16% | 52.56 |
| Buy Friday close, sell Monday close | 1.21% | 34.99% | 54.68 |
| ALL data combined – average (buy/sell daily) | 7.69% | 537.45% | 54.22 |
*Note: only Tuesday to Wednesday is statistically different than the average return (90% significance level) and compared to the worse performing day, Thurs to Fri (5% significance level)
DISCUSSION
Our studies are consistent with Bespoke and show that the aftermarket time frame is when the SPY generates the greatest return. Intraday price movement is actually negative from open to close.
We next looked at the multiday effect. While we know selling FRI at the open should yield better results than Friday’s close, we are using this data for options and options expire at the close. Plus, not examined here, TIME DECAY in options is the greatest on the last day.
When the data is partitioned to the day of the week to account for the “weekend” effect, we find that Monday close to Friday close yields the largest return followed by Fri to Fri and Thurs to next Fri. Wednesday and Thurs to Fri show a surprisingly small loss.
We do not see a significant improvement between buying the open or close and holding to Friday, however, there is a consistent trend showing the close slightly better than the open with the exceptions of Wednesday and Thursday. This may suggest that returns could be improved if a put is sold at the open instead of the close, but it is not significant.
Finally, since SPY has daily options available, we looked at one-day trades on different days of the week. All show a positive return with the exceptions of Thursday to Fri. Possible explanations for the Thurs effect include the Weekend Risk; earnings announcements and dividends (many companies release on Thurs and Fri); and general market sentiment. This could be remedied by not entering trades on earning report days or ex-dividend days.
The best single-day trades are MT, TW, and FM.
When you are entering a new position, let the market settle a little bit before entering. After all, if the stock is moving down why not wait and get a better price? If the stock opens with a gap up, the odds are it will fall during the day or the next day to a lower price.
On the other hand, if the stock begins moving up in a nice steady, linear fashion, it will probably continue going up. That is the time to buy early in the day.
Sometimes, if the market opens high and the stock has gapped up, I will place an order near yesterday’s close and wait. If towards the end of the day, it has not been filled, I will decide if I still want it at the higher price and execute the trade. Often, it will drift down and I get a better price by waiting.
If you are adding to a current position, then you are more interested in the add price than the closing price of the day. I will put in a limit order at the price I want and then wait, sometimes several days. If I get it, great. If I don’t then that means the stock is moving up and I am making money, great!
The good news is Probability Trader Pro already has the day-of-the-week effects discussed above built-in. No need to adjust your trading based on the day of the week.
CONCLUSION
In conclusion, the timing of stock and option purchases can significantly impact an investor’s returns. Our analysis, consistent with previous studies, demonstrates that the majority of the S&P 500’s gains have occurred outside of regular trading hours, making after-hours trading a potentially lucrative strategy. However, for intraday trading, it is advisable to let the market settle before making a decision, as early morning volatility and wide spreads can impact the stock’s performance.
Multiday trades show that buying the SPY ETF on Monday’s close and selling on Friday’s close yields the highest returns, while single-day trades perform best on Monday, Tuesday, and Friday. Investors must consider the timing of their trades and the potential impact of market news, government statistics, and corporate earnings reports. By being strategic about when to enter and exit positions, investors can maximize their potential returns and minimize the risks associated with market timing. Overall, patience and thoughtful decision-making are essential components of successful stock and option trading strategies.