The question asked by many-a trader: Is it worth it to take on overnight risk? Or, put another way, which is better: Buy the close, sell the open — or — Buy the open, sell the close? No clickbait here, we have the actual, data-driven answer thanks to stats from Bespoke Investing.
The answer: Since 1993, it has been better to buy the S&P 500 at the close and sell it at the open than to buy at the open and sell at the close. In other words: The market has heavily rewarded traders who were willing to take on overnight risk. How much? Roughly 1100% in cumulative returns, compared to less than 100% for traders who never took on any overnight risk.
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Options Add a Layer of Intrigue to the Mix
These hefty gains were obtained from simply buying and selling shares. When you add options into the fray, you have a few extra things to consider. You’ll have to choose the appropriate expirations, the appropriate strike prices, and you’ll have to account for theta decay accordingly. However, there’s one factor that helps push options to the top when considering the “buy the close, sell the open” strategy: IV.
Implied volatility is typically higher at the open than it is at the close. Implied volatility is one factor metric that impacts the price (or premium) of the options you’re buying. Simply put, higher IV means a higher chance for the underlying stock to make a large move — the option contract must reflect this. For instance, a stock that is about to report earnings will typically have a higher implied volatility than the same stock on the day after it has reported earnings.
Likewise, in the mad dash of the open, as traders are positioning for the day, option contracts often become a bit more “expensive” relative to later in the day. That means a more favorable environment for option sellers and a more difficult environment for option buyers.
As we said above, this isn’t the whole story. It takes some nuance to accurately deploy options in your trading strategy — that’s what we specialize in at Market Rebellion. We help individual traders build option strategies that they can actually understand, providing simple instructions from world class professional traders. Interested in taking your trading to the next level? Take a look at what we have to offer.
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