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In trading, timing is critical. Especially in this connected world where news and information fly at the speed of light… and your competition is a giant, faceless investment bank with a high-frequency trading desk that makes millions of bogus orders in a second.
So there's little wonder traders feel like they have to set up house in front of their computers to nail the perfect entry or exit point.
This idea, which as you'll see is another Wall Street scare story, even works to keep people out of the markets. After all, people have lives, careers, families, and much better things to do with their time besides being glued to a computer terminal.
I hate that Wall Street pushes people around like this, so today, I'm going to show you how to trade with total confidence and have all the time you want to enjoy life on your terms.
No – the solution isn't to buy a smartphone and trade on the go, although you could if you really wanted to.
What I'm going to show you are three simple orders, just a handful of words, that you can use with your broker or trading platform to get perfect entries and exits every time without being chained to your electronics.
Even better, these orders can actually slash your downside and boost your profits, too…
The Way of the World Today
In times past, a trader would actually pick up a phone and call a human being at a brokerage house, who would take an order to buy or sell at such and such a price, and then relay that to another human being sitting (or, more likely, standing) on the floor of a stock exchange, almost always in the same country.
That created a fairly high barrier to entry, but in the decades since, technology – the great leveler – has lowered those barriers and more and more people can trade more easily.
There are so many opportunities to trade today, all over the world, every hour of the day.
That's why the myth that you have to be connected to the markets 24/7 has been perpetuated. If everyone knew how easy it was to trade, the whales would have much stiffer competition.
I'm going to show you what it takes to be that competition. You can use the order types I'm about to show you to set specific entry and exit points, even sell at the price you want. After all, knowing when and how to get in and out of your trades can mean the difference between a fat stack of cash or a pocketful of lint.
You can step away from your computer and put your smartphone in your pocket and still be secure in the knowledge that you're going to get exactly what you want, provided the trade goes your way, of course.
It's really easy. Let's get started.
No. 1: The Limit Order
A limit order is an order to buy or sell a security at a specific price (limit) or better. In the world of options, you would use this order to limit the price you pay to buy or sell an option – either to open or close an options trade.
Here's an example…
Say you're looking at a September $35 call option with a bid price of $3.50 and an ask price of $3.40. You believe the stock is poised to go higher, but your strict money management rules tell you that you can't spend more than $3.50 per option contract (remember that one contract lets you control 100 shares of the stock).
You already know that a market order leaves you vulnerable to whatever the current price is or what the market maker prices the option for… so you're stuck with whatever price they fill you at the moment they decide to give it to you. And in a fast-moving market, where prices are constantly running amok, this option premium can easily pop up from $3.50 to $3.70.
Now you may think a mere 20 cents more for a trade isn't an issue. But it is, and a big one, too. Here's why I caution against chasing the trade.
Think of chasing an options trade like speeding on the road… You may feel pretty comfortable exceeding the speed limit by, say, five miles per hour. After all, it's only five mph, right? But you may soon feel compelled to push the speed limit by 10 mph… 15… 20 mph… and, next thing you know, you're flying down the road, putting everyone's lives at risk, including your own.
I know this may be a bit dramatic, but the critical thing is to stick to your discipline. The more and more you chase after trades, even if just by pennies, the more you place your money – and your money management rules – at risk.
But if you place a limit order for $3.50 or better instead, you will not spend any more than $3.50 to get your trade filled. What's "better" is that you can't spend over $3.50, but you can certainly spend much less. For example, you may get your trade filled at $3.40 or $3.30. In this case, any price lower than $3.50 is better. So you will either pay your specified price of $3.50, or you will pay a "better" price that is anything lower than $3.50.
Let's look at an example of how a limit order looks on an options order form. Remember that the example I used is simply to show you what a limit order looks like – this is by no means a recommendation.
Here, we've got an example of using a limit order to enter or open an options trade, whether it's a straight call or put or a "loophole trade."
You can also use the limit order when you are trying to close an options trade.
Let's say you own that September $35 call at $3.50, and the stock price drove the value of the call option to a bid price of $5.00 and an ask price of $5.20. You can use a limit order to exit your position and lock in your profits at a specific price or better – just as you would use a limit order to open a position.
No. 2: The One-Cancels-Other, or OCO, Order
A one-cancels-other (OCO) order is in fact a pair of orders where, if one order is executed, the other order is automatically canceled. This is a type of limit order that allows you to manage your options trades – whether you're in front of your computer screen or not. An OCO order allows you to manage your position at any time for the duration of your trade (until expiration) without having to physically be there when the option hits your target or limit price.
Using an automated trading platform, this order allows you to have your account electronically place one order and cancel the other automatically. This type of order is primarily used when you have open positions but you can't be in front of your computer to manually enter and cancel orders.
We're going to look at an example of an OCO order on an options order using the AAPL October $110 calls for $5.00. Remember, these examples are to show how each order type looks and are not trade recommendations of any kind…
Now let's say that you want to double your money on these calls, but you don't want to risk more than 50% of this trade. This means that you'd want to have a limit order to close and a stop order to preserve your capital.
In this case, you'd want to sell the option to close at $10.00 or close (stop out) the order at $2.50. You would place the two orders simultaneously on one order ticket. If the stock trades at $10.00, the account knows to automatically sell-to-close your position at $10.00. And it will automatically cancel that $2.50 stop order.
It also works the other way in that if the computer automatically sells the position to close at $2.50, it will also cancel the other $10.00 sell-to-close order.
This is an example of what that looks like:
No. 3: The Contingent Order
This is hands down one of my favorites. Here's why…
A contingent order is where you initiate two or more transactions at the same time (such as buying a stock and selling a call option at the same time). Like everything we've discussed here, this type of order allows you to be in two places at one time. So you can tend to all the things in your life and still have some control over your open options positions.
The basic premise of using a contingent order for your open options position is that you can sell-to-close your options when the stock hits a specific price.
Let's say that you've got an October $40 call option you've been sitting on and that the price of the stock when you opened the options trade was $43.50. If you have an options risk graph, you can use it to anticipate the theoretical value of your option if the stock price moved higher. And if you don't, then you can at least place an order to sell that call option "contingent" upon the stock hitting a higher price.
You would place the order through your automated trading platform as an advanced order type – specifically a contingent order. You would set the contingent order price to be triggered at the last or latest trade so far that day at "greater than or equal to" the price you specified.
When the latest or last trade so far in the day (not the last trade of the day at market's close) hits the price you specified or higher, the order to sell your position will be executed as a market order – since not even computers know what the price will be ahead of time.
You can place a contingent stop order as well. If you feel that a support price on a stock will get broken and cause the stock to drop big time, you can place a contingent order to sell your position contingent upon the stock's trading price. It will trigger on the last price at "less than or equal to" the price you specified.
This is what a contingent order looks like on an options order form…
Again, this type of "time"-based order entry or exit can be used for anything; I just wanted to show you an example of why you might want to use it for a pending announcement.
How to Plan Your Trade and Trade Your Plan
Over time, you will come to appreciate one type of order over another. A lot of it will be dictated by your personality type, how busy your life is, and whether you have the time you want or need to monitor your positions throughout the trading day.
So you'll want to find the order types that bring you the best results and hang your hat on them as part of your overall trading process, making them part of your (all-important) plan. This will give you an even higher likelihood of success because you have taken care of the planning aspect of trading.
And I want to say just one last thing…
I love spending time in front of my screen, collecting and analyzing data, and of course trading. But even if you're like me – in front of your computer watching, in real time, what's happening in the markets and every price fluctuation – you may want to consider using these auto-executed orders.
Now, it may be challenging to see an option getting close to your stop price without closing it too early, but chasing a trade can cause you to not only lose money, but miss out on future gains.
That's why having your trading plan in place ahead of time, knowing when to take your money and run, and setting up your automatic trading platform can make your life so much easier – and so much richer.
Tom is one of the premier options educators in the world. He's helped more than 300,000 become better, more confident, and most of all, wealthier traders. Click here to get his Power Profit Trades service twice each week. It's totally free of charge, and you'll get a world-class options trading education – and plenty of profit recommendations. You'll even get his latest investor briefing on how to trade one of the world's biggest companies to double your money in 30 days.
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.