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November 21, 2009
Avoid Rookie Mistakes
By Ken Trester
I know from experience that inexperienced options traders -- in their honest enthusiasm -- will bid with a market order and not use a limit order. I outline specific trading parameters in my Fast Options Profits trading service for this reason. Over-enthusiasm and eagerness to get into a trade, no matter what the cost, spoils the market for everyone by temporarily setting an artificially higher price.
Since you should never, ever pay more for options than your limit price -- that is, the highest price you are willing to pay to enter a trade -- what should you do if you don't get in right away?
Don't worry. Try again in a few hours. Then try again the next day.
Suppose you don't get in within a day or two. Bid at the limit on the third day. It's not necessarily always worth it to bump up your limit price -- at least, not by more than a nickel or a dime, at most. Nothing hurts more than paying more than you intended and then having the trade not work in your favor.
A Second Solution
But if patience isn't your forte, there is one easy technique that you can follow to get better trade executions or better options prices. When you are determined to buy (as you should be), test the waters first.
For example, let's say you want to buy an option that I've recommended at $1.30 or below. To buy that option right now, you will need to pay $1.30, the ask price.
But take a minute or two to test the water. Enter a limit price of $1.15 and 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 asked 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 asked price by entering a higher limit order or at the asked price.
In his Fast Options Profits service, Ken provides two options trades per week, complete with Buy Under, Target and Sell Stop prices. Click here to try Fast Options Profits risk-free and see what he's recommending next!
Ken Trester is Editor of Fast Options Profits.
