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Use Limit Orders on Options Trades

By Ken Trester

How does that work?

If you use a limit order (instead of a market order) when opening a position, you can tell your broker how much you are willing to pay to enter a trade.

For example, if you enter a limit price of $1.15, you can see whether the market-maker will bite. You will be surprised at how many times you will get your price (i.e., $1.15) instead of the ask price of $1.30.

If your order at $1.15 is not filled after a few minutes, you can modify your order and pay the ask price by entering a market order or limit order at the ask price (that is, you can tell your broker to pay no more than $1.30).

It's worth it to take a few extra minutes and try to get a trade cheaper than you were planning to pay. What's the harm -- the market-maker can only say no, right? You might be surprised at what you can get, if only you ask for it.

That's the beauty of the limit order -- when you're buying options, you choose the maximum amount of money you're willing to spend to enter each trade. And if the option trades below that level, you will get in on a discount because you're positioned to get that price or better.

The same goes for when you're closing a position -- you can also use a limit order to close the position when an option trades up to (or through) a certain price. For instance, suppose the option for which you paid $1.15 doubles in value to $2.30. You can tell your broker to close the trade for $2.30 or better, which means it could be closed for $2.50, if someone is willing to pay that amount at the time your order is placed. And that translates into an extra 20 cents in your pocket -- that's $20 per contract!

The only potential drawback is that, if the option price does not trade at or below your order price, you won't get into that trade unless you revise your parameters. Just be careful to not overpay to get into a trade and to not take profits too soon.

I can spot a bargain-priced option from a hundred miles away, and know when it's time to jump on board or cash out of a particular play. But when it comes to making the most money on a winning trade, it's each individual's responsibility and even prerogative to seek the best prices possible to turn a winner into an even-bigger success.

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