I came across an article today about how the average mutual fund investor isn't making any money in the stock market (according to a recent study by the Center for Retirement Research). What's worse is that they're actually losing money – despite record highs.
The author concluded by making one point: "you simply can't time the markets."
But he couldn't be more wrong. In fact, he's wrong on multiple levels.
Not only can you time the markets – you can cash in on any stock move without even looking at your computer or calling your broker.
And it all boils down to these four little orders…
When Trading Options, These are the Best Four Orders You Can Use to Set Your Trades and Go
Last Friday, we talked about the lies Wall Street's been feeding you about options trading. As you'll recall, it's not that options are too risky or too complicated… it's that they're so lucrative and so easy use that the billionaires can't stand even the thought of an "average investor" sharing the profits.
Now I already showed you how to get started. And now, I'm going to take you through the only five orders you need to set your trades – and wait for profits.
But before we get to that, I want to take a minute to talk about how you open and close a trade. After all, the type of order you'll need to place depends on whether you're opening or closing a trade…
Buying-to-Open and Selling-to-Open Calls and Puts
When you open a call option trade (also called "taking a position"), you're purchasing the right to buy a stock at a specific price on or before a certain date. When you open a put option trade, you're purchasing the right to sell a stock at a specific price on or before a certain date.
Whether you're buying-to-open a call or put trade, your position stays open until either the option expires or you sell-to-close your trade. With what's called American style options, this can be done prior to expiration. European style options can only be exercised at expiration.
You can track open option contracts by looking at open interest (OI), which you can find on your brokers trading platform.
Buying-to-Close and Selling-to-Close Calls and Puts
When you close a call option or put option trade, it means you're relinquishing your right to either buy or sell the stock. You can do this prior to expiration, which means that you're accepting either a profit or loss on the trade at that time. But the most important thing is understanding your online trading platform and selecting the proper order execution. There have been too many instance when novice options traders inadvertently sell-to-open an option instead of selling-to-close it. This mistake leaves them with an open naked option (we'll talk about that later) – which is an ultimate-risk situation to be in.
With that, let's talk about the four order types you'll need to know…
- Market Order: This is an order that essentially leaves you at the mercy of the markets as of that particular moment you're placing your order. You're going to open or close your position at whatever the current price for the option is. For example, if the bid/ask spread on an option (the difference between the price you're willing to pay and the price you're willing to sell) is $2.00 x $2.20, then that means you're likely buy it at $2.20 (or higher if the ask price moves higher than $2.20 by the time the order is filled).
- Limit Order: This is an order that specifies the maximum price you're willing to pay to open your position. Using the example above, you'd be placing a limit order if you place your buy-to-open order at a $2.00 limit. This means that no matter what happens in the markets, you're willing to pay $2.00 or less – but not a penny more.
- Contingent Order: This is an order type that allows you to open an options trade "contingent" upon the stock (or other underlying security) hitting a specific price. So say you want to buy-to-open a certain call option when the stock hits a certain price point, you'd place a contingent order. And when the stock hits that contingency price, your trade will be executed (whether buying- or selling-to-open). Again, make sure you work with your broker to understand your online trading platform and exactly how to place this type of order.
- Walk Limit: This is an order designed to help you eliminate the tedious task of manually adjusting your trades. So using our same example above, if you don't get your trade immediately filled at $2.20, you run the risk the price moving away from you. In that event, you'd need to cancel the order and place another one at a different price in the hope of getting that filled. The problem is, this can take several minutes of precious time – and you still may not get filled. end and even then, you may not see a fill.
That's where the walk limit order comes in… It's designed to help you get a filled within the bid/ask spread -without the hassle of having to manuall modify your order. Here's an example of walk limit order on a call spread quoted at the National Best Bid/Best Offer (NBBO) at $1.10 x $1.35, on an options order form (using OptionsXpress):
Now rather than trying to work the spread yourself by placing an order that may or may not have to be manually modified by cancelling and re submitting an order at a different price – simply set a walk limit order and let your trading platform "walk" inside the spread at penny or more increments until it gets filled at a price within the NBBO quote.
As you can see above, this example starts with the mid-price $1.23 and walks up to a limit price of $1.35 until it hits a price the order will fill. In this case, the trade got filled at $1.31, or $0.04 better than the bid/ask offer. Every penny adds up over time – which will pay off big time in the long run.
Whatever price at which you open your position, you can do the math and calculate the price at which you'd need the option to be trading in order to realize a 100% gain. So if you bought a call option at $2.20 (less commissions and fees), then you'd need it to reach $4.40 in order to hand you 100% gain (or a double, as I like to call it). And you can place a sell-to-close order at $4.40 using a limit or walk limit order, too.
One more thing…
I told you that when it comes to options, you don't have fall victim to the markets and gluing yourself to your computer screen. And there are two more orders I want to touch on that you can use to set your trades and go enjoy your day…
Day Order: this order is only good for that trading day (or session). You can use if you don't want to leave you order open longer than one trading day.
Good-'til-Canceled (GTC) Order: this order is only good for the next 30-90 days, depending on your broker. ask oyur brokerage support how long their GTC orders are good for. If you don't get filled within this time frame, then you would need to open a new position.
Now if you have a virtual trading platform, I encourage you to become proficient with placing these types of orders so you're comfortable executing them when you're ready to trade in a live account. Brokers with an online trading platform will (or should if they are worth their salt) have live support during market hours to help assist you with your online order placement. And even when you've got all the kinks worked out and feel confident about placing a real order, keep your line of communication open with your broker and trading support team. That way, you're never left worrying about whether or not you placed your order correctly.
To your continued success,
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.