Entering And Exiting Options Trades
As the option trading depends on the value of underlying asset, a small change in the option price would give greater results on returns. The bid is the highest price a trader is willing to pay to buy an option whereas ask is the price a trader accepts to buy an option. Ask price usually will be higher than bid price. The difference between these two is called as ‘Spread’. The spread will be narrow for most liquid assets and will be low for illiquid options. In volatile markets, the spread will be more as there exists low-volume demand. In contrast, the spread will be more in non-volatile market as there exists high-volume demand.
When to enter a trade
An opening transaction can be made with a market order or with a limit order. It is always preferred not to use market order as the order gets filled not exactly at the same ask price because of market movement. This generally occurs in highly volatile markets.
The alternative to enter into options trading with a limit order where you select a price which is believed to be reasonable to pay. There is no guarantee that the order gets filled at that price if it is lower than the ask price.
Exiting from trade
Using different options trading strategies, One can choose to exit from options trade by placing a market order or with a limit order. One can also use other alternatives like placing a stop loss order or a stop limit order. A long option can be sold and a stop loss order can be placed to exit.
In the case of selling options, an order to sell option will be activated when it trades at trigger price or lower; or when the ask price is equal or less than trigger price. It becomes a market order to sell once it is activated. It is preferred to use this order under extreme conditions to avoid losses.
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About the author:
Dr. Harsimran Singh was awarded a Ph.D. by a California University for his research work in options trading strategies and he authored 12 books. He traded stock options for 35 years. At times, he traded over a $100 million in a month in his personal account. His research work in options trading has been filed for getting patented with The US Patent Office under Application # 61/999,957.