5 rules of ordering an options trade
The last thing you have to do after all the hard work on market research is ordering the trade. You would not want to let last step throw you off balance.
Here are 5 fundamental rules to learn by heart:
1. Use Limit Order religiously to Open a Trade: How many times you use market order and get filled with a nasty, expensive trade? You sit there and shock with how much you are forced to pay.
Market order gives you whatever price the market maker wants to give you. You can bet he will want to give himself best price and leave you the worst.
Market order is a guarantee-you-the-worst-price-possible.
2. Use day orders to open a trade: Most beginners make a mistake of using good-till-cancel (GTC) order to enter a trade. It is not a complete disaster but won’t work best for you.
What happens is the market maker sees it coming and since GTC is not the top prority and he tends to put in his pocket and forgot about it.
3. Don’t pay too much for your trade: Oftentimes you see the bid/ask quote and think that is the only buy-and-sell price that you can get. However, the fact is that you can negotiate and lower your opening cost.
The rule is start with the mid-price (Take the bid and ask price and split into half).
4. Be flexible with your negotiation:
It is possible that you won’t get filled the 1st time trying to get the price that you want.
Remember people on the other side need to get a good price for himself too. So, be flexible and adjust your bid/ask to the point of price discovery.
Yes, you can be cheap and get what you want.
5. Spend time to learn the broker platform: Whatever online broker you use to order trade, spend a great deal of time to learn how it works. This will pay off big time.
You don’t to be clueless and click on the wrong button in a hurry to make a profit.
Each broker platform has different interface and procedure that you need to follow to the point of getting filled. So contact them so they can guide you through if need be.
Category: OPTIONS BASICS
