Don’t use market orders when opening a new option position. Options, unlike stocks, can have a very high bid/ask spread. This spread can really cut into your profit if you end up buying the ask and selling the bid. Suddenly, something that looked so good on paper doesn’t measure up in the real world. It gets even worse, the more legs you have.
So, when opening a position, use limit orders and try to get filled at the mid. You may need to be patient for this to happen. You may also need to cave in somewhat on your price, that’s up to you. Just don’t go so far that you end up not being able to make a decent profit.
Naturally we can’t be at our computers all the time. So it does make sense to use market orders if you need to exit a losing position. If you’ve hit your maximum loss, then it’s time to get out. No if’s, ands or buts.
{ 2 comments… read them below or add one }
Disagree with final paragraph.
If you have to get out, bid enough to get filled. Or raise the bid 5 seconds later.
DO NOT use a market order when trading options.
That’s true Mark, it is the preferable way. But in cases where you can’t be at your computer, you can get hurt pretty badly if you’ve put in a limit order expecting it to get filled. If I know I can’t be around, I’ll put in a contingent order to get out at market when I’ve hit my maximum loss.