Trading Options

Trading Options

Know Your Basic Order Types for Trading Options

Investors have several order choices to consider when it comes to trading options. For example, you can buy or sell at a specified price. Or you can buy or sell immediately, at wherever price the market is trading right now. You even have control over how long your order will be active in the marketplace when trading options - you can place an order that is good for one day only or for an extended period.

Understanding how different types of orders work when trading options may make a difference in whether your trade gets executed - or not - and at what price. Here are five of the more common order types from which to choose from when trading options:

Trading Options Using Market Orders

A market order is generally the most frequently used order type for trading options. Market orders are used once you have made a decision about opening or closing a position, and may keep you from chasing a market trying to get in or out. When trading options, a market order is executed at the best possible price obtainable at the time the order reaches the market.

Trading Options Using Limit Orders

A limit order is an order to buy or sell at a designated price. Limit orders to buy are placed below the current market, while limit orders to sell are placed above the market. Since the market may never get high enough or low enough to trigger a limit order, an investor may miss the market completely if he chooses to place a limit order. Especially when trading options, you may see the market touch a limit price several times, but this does not guarantee a fill at that price.  I recommend you expound on this point a bit further by adding a sentence that explains a limit order is only guaranteed a fill if the market trades through the limit price.

Trading Options Using Stop Orders

Stop orders can be used for three purposes when trading options:

- To attempt to minimize a loss on a long or short position;
- To attempt to protect a profit on an existing long or short position; or
- To attempt to initiate a new long or short position.

A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the stop order is said to have been "elected," will be treated like a market order, and will be filled at the best possible price.

Trading Options Using Stop-Limit Orders

A stop-limit order is used by the trader who doesn't wish to be filled any worse than his stop price when trading options. Here, the stop and limit prices specified on the order are one and the same. This order becomes a straight limit order if, once the stop is elected, the broker is unable to execute the order at the stipulated price or better. Also, a stop limit order will be placed as a straight limit order if, when received by the exchange, the stop price already has been violated.

Trading Options Using Market on Close (MOC) Orders

This is an order to buy or sell at the prevailing market price during the closing range (usually, the last 30-60 seconds of trading). An MOC is similar to a market order in that no price is specified during order entry, and is ideal for a trader who wishes to offset an existing position by the close but doesn't want to wait until the last minute to enter a market order when trading options.

Duration When Trading Options

In addition to order type, investors trading options also need to select between two duration possibilities for their orders in the marketplace. A Good Till Cancelled (GTC) Order, for example, is often used in conjunction with a Limit or Stop order. The order will remain valid and work until the trader cancels the order, it is filled, or the option expires. GTC orders do not cancel automatically when trading options- they remain working in the marketplace until executed or until cancelled by the trader. If an order is not designated GTC, it is a Day Order and will expire at the end of the current trading session unless filled or cancelled prior to the close.

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