SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Market Orders vs. Limit Orders


While advanced trading platforms allow you to customize orders endlessly, most of them still boil down to a few basic types of orders:

  • Limit Orders
     
  • Market Orders
     
  • Stop Orders
     
  • Stop Limit Orders

While the type of order you use might seem like a trivial detail, it can actually make or break a trade’s profitability.

What is a Limit Order?

In a nutshell, a limit order is a way to buy or sell a stock at your limit price or better.

 

A limit buy order for $2.25 means you're willing to purchase the option contract at any price up to $2.25. If someone will sell it to you for $2.20, your order will execute at $2.20.

 

It works the same way on the sell side. A limit sell order for $1.50 means that $1.50 is the lowest price you’ll accept for your contract.

 

Typically, option traders should only use limit orders and different variants of them, as market orders can

 

Limit orders are the building blocks of financial markets. At their core, exchanges are big databases of limit order books with matching algorithms.

 

What is a Market Order?

Market orders are orders you send to the market for immediate execution. This means accepting the best available price based on the best bid or offer.

 

Using market orders is a very aggressive strategy and generally only reserved for those emergencies when you need to exit a market in a panic due to a mistake.

 

Below are the bid/ask spreads for a series of Tesla (TSLA) options:


image.png
 

Submitting a market order to buy, for example, the 870 call in this series, would most often result in you paying $43.00 per contract.

 

‘No problem,’ you say, ‘I’m willing to pay $43.00 for those contracts.’

 

The problem is that market orders are like blank checks to the market. You're telling the market, "I will take any price you give me for this order." It's like going to a real estate agent and saying, "I want to buy this house, even if the seller revises his price upward between now and when you give him the offer."

 

Not so fast, because there are four problems with using market orders.
 

Stale Quotes

Market orders have no mechanism to protect you from high-frequency market makers who change their quotes at the speed of light. See this 2011 case where a retail trader submitted a market order to buy an ETF trading at $26, only to see his order executed at $35 due to market illiquidity.

 

This issue of market illiquidity is only compounded in the options market. Liquidity is fragmented across a series of options contracts. While there are thousands of stocks to trade in the stock market, each stock can have dozens or hundreds of different contracts. Few traders are willing to take the other side of your trades in a specific option contract at any given time.

 

For this reason, you should never use a market order in options trading. While it's generally advisable not to use them when stock trading, it's far less risky. If you're trading a liquid stock like Apple (AAPL), you might lose a few cents if the quote you rely on goes stale after sending a market order. But order books are very thin in the options market, ensuring significant slippage if the quote goes stale.

 

Aim For the Midpoint With a Limit Order

The ‘midpoint’ in options trading is the midpoint between the bid and ask prices. If the bid/ask is $4.00/$6.00, the midpoint of that quote is $5.00.

 

If the option has sufficient liquidity, the midpoint can often act as an approximation of its theoretical or “fair” value. And as a result, market makers or other traders are frequently happy to trade with you at the midpoint, especially if you’re willing to be patient.
 

The difference between hitting a bid or offer and taking liquidity from the market makes a huge difference in a trader's career. It can be the difference between long-term profitability and breaking even.

 

While you won’t be able to get the midpoint 100% of the time, you can get it often enough that you should make a habit out of pricing your orders at or near the midpoint unless you have a compelling reason not to.

 

Wide Bid/Ask Spreads

The bid/ask spread is the difference between the best bid price and the best offer/asking price. In highly liquid stocks like Apple (AAPL) or Microsoft (MSFT), the bid/ask spread can often be as small as a penny when just trading the stock.

 

This isn't exactly true for the options market. Not all options trade in penny increments. In fact, the minimum pricing increment for many options is $0.05 or $0.10. According to TD Ameritrade, here are the current minimum price increments in the US options market:

 

Contract Price Range

Price Increment

$0.10 - $3.00

$0.01 or $0.05

$3.00+

$0.05 or $0.10

 

Consider that even for an option priced <$3.00 having an $0.01 increment, a penny is still a significantly larger percentage of the price than it is for a share of stock like Apple (AAPL) priced above $100.

 

Option Bids and Asks Are Bad Prices

The best bid price is generally well below an option’s theoretical value, and the best ask above it’s theoretical value. So sending a market order to the market almost always means that you’ll be overpaying for your options or not getting enough when you sell them.
 

What To Use Instead of a Market Order: Marketable Limit Order

Perhaps submitting a limit order at the midpoint and patiently waiting to be filled isn’t an option. Maybe you’re making an event-driven trade and you need to get in/out now, or maybe you forgot to close your trades and the market closes in 30 seconds. Sometimes you require instant liquidity.

 

So if market orders aren’t an option, what do you use when you need instant execution? Marketable limit orders.

 

A marketable limit order carries all the benefits of a market order without any of the risks of insane slippage.

 

Marketable limit orders aren't a special option in your trading platform. You can create one with just a simple limit order ticket. You only need to price the order at the bid or ask, and the order becomes eligible for instant execution.

 

For example, let's say you want to submit a market order to buy an option with a bid/ask of $4.50/$4.55. To submit the equivalent marketable limit order, you would send a limit order to buy the option one tick above the asking price, in this case, $4.60. In this case, if the quote you're relying on goes stale, then the worst that could happen is that you get filled one tick above your expected price.

 

Summary

Seasoned options traders never use market orders for four reasons:

  • The quote you’re relying on might be ‘stale' when your order makes it to the market, meaning you might end up paying more than you expect.
     
  • Generally, a market maker will fill you if you submit a limit order at or near the midpoint.
     
  • Bid/ask spreads are much higher in the options market than in the equity market.
     
  • The asking (bid) price for any option is generally well above (below) the theoretical value of the option contract. It isn't easy to be a profitable trader if you consistently pay too much or receive too little for options.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Option Settlement: The Basics

    At their core, options involve buying and selling the rights to transact in a specific asset. When you buy a call option on AAPL, you're paying for the right to buy AAPL at a special price before a particular date. But all options expire, and at expiration, the two parties of the contract need to settle up with each other. This process is called settlement.

    By Pat Crawley,

    • 0 comments
    • 76 views
  • Pros and Cons of Weekly Options

    Weekly options used to be a niche product only reserved for gamblers and last-minute hedgers. However, weekly options are now listed on most major stocks and account for a significant portion of overall options trading.

    By Pat Crawley,

    • 0 comments
    • 137 views
  • Iron Condor Vs. Short Strangle

    The journey of an options trader's development typically has several stops along the way. The first is generally related to using options to leverage their directional bets using outright calls, puts, or vertical spreads. Somewhere along the way, a novice options trader begins to understand volatility's importance to the options market.

    By Pat Crawley,

    • 0 comments
    • 210 views
  • Short Gamma vs. Long Gamma

    Gamma is one of the primary Options Greeks, which measure an option's sensitivity to specific factors that could affect an option price. Despite traders hyping up several different Greeks and second-order Greeks like "Vanna" and "charm," there are only four primary Greeks that you need to be familiar with to understand options trading.

     

    By Pat Crawley,

    • 0 comments
    • 239 views
  • 7 Steps To Take Your Investments To The Next Level

    Investing is one of the most important activities you can do for yourself. In today's world, it's becoming increasingly important for individuals to take control of their financial future and ensure that their investments are working in their favor. So if you're looking to take your investment strategy up a notch, there are seven essential steps you should take.

    By Kim,

    • 0 comments
    • 1,090 views
  • SteadyOptions 2022 - Year In Review

    2022 marks our 11th year as a public trading service. We closed 147winners out of 215 trades (68.4% winning ratio). Our model portfolio produced 90.5% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month in 2022. 

    By Kim,

    • 2 comments
    • 1,175 views
  • Steady PutWrite 2022 Year In Review

    The Steady PutWrite service consists of two separate strategies available to subscribers known as Steady PutWrite and ETF BuyWrite. Steady PutWrite sells monthly at the money puts on equity indices targeting total notional exposure of 125% and then invests collateral in bond ETF’s.

    By Jesse,

    • 1 comment
    • 633 views
  • How Much Do You Need to Start Trading Options?

    Theoretically, anyone can trade options. After all, there are listed options that you can buy for as cheap as $1.00. So what is the right amount of money you need before you can officially dip your toe in the water and give yourself a fair shot at becoming a profitable options trader

    By Pat Crawley,

    • 0 comments
    • 1,020 views
  • Options Strategies for Small Accounts

    Ask a handful of traders what they deem a “small account” to be and you’ll get probably get a few different answers. For the sake of this article, we classify a small account as having less than $5,000. There’s a number of obstacles you run into trading a small account, like the options in certain underlyings being too expensive for you to trade, as one example.

     

    By Pat Crawley,

    • 0 comments
    • 1,008 views
  • 7 Things I Wish I Knew When I Started Trading

    Options Trading can be very exciting and rewarding. But you should not be trading options before learning at least some basic facts about options. Options are very different from stocks.  This article presents 7 basic options trading facts that every options trader should know. Don't start trading of you don't understand them.

    By Pat Crawley,

    • 0 comments
    • 998 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido