Stop Routing Market Orders on Options. Tom Preston Says You're Getting Eaten Alive.

GE

Using limit orders for in-the-money options, such as GE options, allows traders to control the execution price and avoid slippage. By specifying a limit price, traders can ensure they are not filled at a worse price than intended. This is particularly important in fast-moving markets where market orders can lead to significant slippage. If the market price moves beyond the limit price, the order may not be filled, but this is a controlled risk compared to the potential slippage from a market order.

Avoiding Market Orders for Options Trading

Routing market orders for options can lead to poor execution due to lack of control over price and timing. Market orders are not held to time or price, which can result in slippage and higher costs. Limit orders are preferred as they set a maximum price, ensuring the broker cannot fill the order at a worse price. This principle is applicable in both electronic and traditional trading environments, with the main limitation being the potential for slippage in fast-moving markets.

Limit Orders vs. Market Orders in Options Trading

Limit orders provide better control over execution price by allowing traders to specify the price at which they are willing to buy or sell, whereas market orders execute at the current market price, which can lead to slippage. Limit orders are recommended for reducing slippage, especially in fast-moving markets or when dealing with options, as they allow for price discovery and better execution control. Market orders should be avoided unless there is minimal time left before expiration, where adjusting the limit price to match the current market price is preferable.

Control Slippage with Limit Orders

Limit orders are essential for controlling slippage in trading. The speaker emphasizes that while traders cannot control market direction or trade outcomes, they can manage slippage by using limit orders instead of market orders. This approach ensures better execution prices, especially in less liquid markets like certain options. The speaker also highlights the importance of using limit orders for both options and stocks, as market orders can lead to unfavorable fills.

Why should traders avoid market orders for options?

Traders should avoid market orders for options because they lack control over price and timing. Market orders are not held to time or price, which can result in slippage and higher costs. Limit orders are preferred as they set a maximum price, ensuring the broker cannot fill the order at a worse price.

TakeawayUse limit orders instead of market orders to maintain control over execution price and reduce slippage.

Should I use market orders or limit orders when trading options?

Limit orders are generally preferred for options trading to control execution price and reduce slippage. Market orders should be avoided unless there is minimal time left before expiration, where adjusting the limit price to match the current market price is preferable.

TakeawayUse limit orders for options trading to avoid slippage and control execution price.

What is the difference between limit orders and market orders in trading?

Limit orders allow traders to specify the price at which they want to buy or sell, ensuring they get at least the desired price. Market orders execute immediately at the best available price, which can lead to slippage, especially in less liquid markets.

TakeawayUse limit orders to control slippage and ensure better execution prices, especially in less liquid markets.