by Wendy Kirkland
Market orders trade at the current price, these include both buy or sell orders in which the broker is to execute the order at the best price available, which should be very close to the price shown on the options chain. If you are trading during market hours (Wall Street hours, and therefore, EST), there shouldn’t be any unexpected surprises if you are using an online broker. If you are calling your broker to place the trade, the price can change during the time it takes to connect with your broker.
Stock prices often change quickly in a hot market where a price moves up or down within seconds. Options prices change a little more slowly, but as you click “Place Order” the option could go up or down a few cents. The sale with a market order online happens in seconds.
With a limit order, you specify at what price you want to trade, and the duration (trading day or until canceled) they should float the order, that is, try to fill it at the price you requested. If the market never reaches the price you specified during that period of time, the order will be canceled. This strategy can be useful if you are going to be away.
If you are going to be away and can’t personally place an order at the price you’d like, then place a limit order and leave it in effect for the period of time that you will be away. The disadvantage to this is some brokerages demand that you have more in your account than the amount needed to make the purchase. If this happens, place a limit order and increase the limit amount by a dime or fifteen cents to cover an increase during the moment of execution. The order will be filled at the lowest amount possible from the available exchanges.
Under normal circumstances, you would place a market order at the moment you are interested in buying and the order will be filled.
Two rules to adhere to:
NEVER place a market order after or pre-market. If you do, your order will be filled at the opening price, and that amount very well may be on the initial jump of the market out of the gate. Then as the market settles after the first 30 minutes or so, you find you could have bought for considerably less, so right off, you are in a position of recovering from a loss. If you zero in on a trade overnight or first thing in the morning, watch the stock and evaluate the trade at 10:15 – 10:30 am, an hour after open, does it still look like a good buy? Can you get in now for less than you would have paid at 9:30 am EST? If you are going to be away during the first hour or so of the trading day, then set a limit order, by setting the highest price you are willing to pay. The order will be placed at the lowest price, and there will be no unpleasant surprises.
NEVER chase an option. I have heard of traders changing limit prices every few seconds as the price of a stock moves above their limit. In the time that it takes to fill in the order form, the equity’s price moves beyond their price. If you want to buy, use a market order and grab the position or set the highest amount you are willing to pay and stick to it. If you chase a stock’s price, moment by moment, the essential information you used to base your decision in the first place is changing. The spread may have increased. You want to trade on your researched information or as close to it as possible.
Limit orders can be used in a variety of ways. You can use a limit order to purchase an option. You can also use a limit sell order to take profit. There are several reasons that this can work out well.
Let’s say that you have a profit target on a particular trade. You would like to sell just before the price reaches a previous resistance level, yet you are going to be out for the afternoon and don’t want to close the trade now rather than let it run its expected course. In this case, you can set a limit sell order so that the trade is closed when the equity’s price reaches the amount you set as a “sell to close limit”.
Another way to use a limit order is to set a profit dollar amount. Let’s say you purchased 10 contracts for .35 cents premium per share. $35 times 10 = $350. For this trade, you would like to earn 50%. So you place a limit sell order for .50 cents, which will give you .20 cent profit once the bid premium reaches .50 cents. Eighteen cents will give you the 50% gain or $180 and the additional .02 cents will cover the trading fees.
I have found that when I have a profit target in mind, if I use a limit sell order, I often make more profit. The reason for this is, no matter how fast I am; I am slower than a computer. As an example, let’s say I have a profit target in mind. When the stock’s price reaches $42.20 just below the resistance level of $42.25, I plan to sell. I am watching the computer screen with the chart and I have my “market” sell order set up on my online brokerage account.
There you go, just as I expected, the stock sits for a few minutes at $42.17, and then, in a flash, it shot up and tapped $42.25 and immediately I started to pullback. I quickly flip over to my sell order and push the button. The trade is closed at $42.15.
Had I placed a limit sell order for $42.20, the position would have been closed when the price ran through that amount on its way to $42.25. The result would have been that I made .03 cents more per share, and on 10 contracts that would be $30 (an amount that would have covered my trading fees).
Now there is a downside to limit orders. They can limit profit. In the example above, if the price continued on up through the $42.25 resistance level, my limit order would have been closed at $42.20, cutting my profit short. But the way I see it, there is nothing short about earning a profit. If the trade appears to be one that is defying gravity and pivot points, I can wait for a pullback and reenter.
This is one of the areas where our core beliefs can be changed. We need to allow ourselves to be right no matter what happens. Traders so often set themselves up for criticism no matter what the trade result. “Oh, I got out too quick and left money on the table.” Or “If I had sold sooner, I would have made another $100 bucks.”
Allow yourself to get it right. Give yourself a pat on the back for earning money that wasn’t in your account yesterday. Change your thinking and give yourself credit for executing a profitable trade. Or for selling and cutting a loss short. Congrats, you followed your trading plan!
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