Options vs Stocks at the open

I have been playing with stocks for such a long time it is hard to break out of that mindset.

Having said that, there is one important difference between stock and options trading that I am finding very valuable to me.

The bid / ask spread at the open.

Options are priced based on the underlying stock price, implied volatility, strike price and a few other factors that I have not looked at yet. Stocks are priced based on what someone is willing to buy or sell them at at that particular moment. The moment that causes me the most problem is the first moment as the market opens and particularly on stocks that do not trade pre-market.

The reason this is such a hassle is due to my stop loss orders. A stop loss on a stock will be triggered when the bid hits the stop price, then the order is placed as a market order and the position is sold at whatever price it will get. I tend to check the pre-market spread and very often see that the spread is large enough that the bid is under my stop even though the ask is way over my stop.

One day I called my broker and asked them what happens in the case of such a wide spread at the open. "The stop would be triggered and executed".

I have been massaging my stop orders pre-market as a result, move the stop down to accommodate the low bid and move it up after the open to where it was or cancelling VTSOs and hoping to be able to re-establish them afterwards. This is just s nuisance. VTSOs are not so easy to re-establish as a 75 cent VTSO that is up to, say $10, needs the stock to be up to $10.75 in order to re-establish at $10. The stock may only make it up to $10.50 so I have to watch my stop at $10 until the price hits $10.75 to re-order the VTSO.

Stocks that trade pre-market have already gone through this initial spread issue and are trading with a normal spread by 0930h so the issue is not an issue. If the price opens below my stop then it is not artificially there and I will let the order go.

The whole point is that the options do not get re-priced until AFTER the market is open as they need to see the price established by trading FIRST.

There are two ways to look at the option angle.

1) buying options that do NOT require a stop (ITM or OTM)
2) using stops as profit protection and not being concerned about the open spread on the stock

In either case the option still does not go through the volatility at the bell that a stock does by it's very nature.

Chalk one more up for options over stocks...one day I will make a list of these reasons.

Jeff.