Market orders are a recipe for disaster when trading many options. Unlike stocks, options have wider bid-ask spreads and lower liquidity, which means using a market order can leave you paying far more — or selling for far less — than you expected.
If you want to trade options like a pro, you need a better approach.
The Problem With Market Orders
When you place a market order, you’re telling the broker to fill it at the best available price. With stocks, that usually works fine since bid-ask spreads are often tight, and liquidity is high.
But options are a different story…
Take Tesla (TSLA), for example. The stock might have a bid-ask spread of just a few cents, making market orders relatively safe. But a TSLA call option could have a spread of 50 cents or more.
If you use a market order, you could end up paying the asking price, even if it’s far above a reasonable value. The same goes for selling — you might get filled at a rock-bottom bid price instead of something more reasonable.
The Smarter Alternative: Limit Orders
Smart traders use limit orders instead.
A limit order lets you set the maximum price you’re willing to pay — or the minimum price you’re willing to accept if you’re selling. That way, you control the price instead of leaving it up to the whims of the market.
A good rule of thumb is to start by placing your limit order near the midpoint of the bid-ask spread. If the bid is $1.00 and the ask is $1.50, try entering your order at $1.25 or $1.30.
If you don’t get filled, you can always adjust slightly.
By using limit orders, you avoid overpaying for options and protect yourself from getting fleeced by poor liquidity. It’s a simple shift in execution that can make a big difference in your trading results.
Kane Shieh
Kane Shieh Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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