Options Orders: How to Open and Close

Before attempting to open any trade the homework must have been done and the optimal tactical approach, relative to the risk/reward ratio, has been chosen (spread, shooter, etc.). All of that pre-trade work can go awry very quickly if it is not executed properly as per predetermined pricing parameters. Otherwise, it's the option trader's way of fumbling the ball on the one-yard line.

Trade execution is a learned discipline that must be adhered to, or else! That or else implies that if the trader loses his/her discipline sooner or later that trader will react on an emotional level when executing trades. Trading with emotions not held in check eventually opens the portal to Wall Street's proverbial graveyard.

My personal discipline is to open any option trade using a limit order. Do not give any trading pit a market order to fill when opening a trade! I know that fact as I was on the other side of market order executions when I was an R.O.T. (Registered Options Trader). Pit traders are not altruistic do-gooders. Thus, do not expect any nice surprises from them. Simply do yourself a big favor and open any trade using a limit order. Remember this: no one is forcing you to open a trade!

When closing a trade, using a market order tends to beget fair executions if liquidity is ample. Thus, only use a market order to close if that pit has both tight markets (bid and ask spread very tight) as well as more than ample volume in the strikes and expiries you want to close out. In addition the timing of the closing execution is a trader's ally if the trader is closing on the opposite side of the majority of that particular market. That majority will tend to bid up for your order if you are a seller and will offer nicely low execution prices if you are a buyer. They will be so nicely accommodating for you because they are the ones executing with some emotion!

Knowing what the majority's bias and position might be is an important element for any closing execution that you might be readying to attempt. Of course you can also use limits in such a situation, but be careful not to be cute or stubborn with that limit as you do not want to miss-time any closing trade.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits