Order Entry

[Igor 10]

When traders want to buy or sell options, they must place an order with their broker. Most traders do this online by simply choosing an option from an options chain and clicking the order icon. A separate window opens up, and the investor can add additional details and instructions before sending the order to auction. An order will only execute after it meets all the trader's conditions.

 

 

Quantity, Price and Duration

After confirming the underlying security, expiration month and the strike price all order entries require the trader to choose quantity and price. One contract equals 100 options. The amount a trader can invest depends on the balance in their investment account (margin). An option's cost depends on the quantity multiplied by its price. The profit (or loss) taken from close orders also depends on quantity and price.

 

The following order entry on a call-buy order would cost:

Quantity: 10 contracts (1000 options)

Price: $2

Total cost: $2,000 (before commission costs)

 

Duration falls into order entry fine tuning, where a trader designates exactly how they want their order executed.

 

Fine-Tuning Orders

An investor can add more instructions to their orders, which can accommodate their investment strategies and prevent a loss in capital or leakage.

 

Market Order

Using this type of order, the trader's request executes immediately. Investors use market orders to get into the market quickly. The downside to this is that the investor must take the price given at execution. In low volume auctions, prices can vary considerably.

 

Limit Order

Placing these types of orders puts traders in full control of the buying or selling price. The order will not execute unless the option's market price hits the amount on the order request. The disadvantage to this type of order is that a trader's request may not execute, which would leave them out of the market. Also, a trader's order may only partially execute when placing limited orders.

 

Stop Orders

Sometimes investors like to limit or control their losses when they guess wrong. Placing a buy or sell stop order tells investors exactly how much they will lose if an option's market value swings in the opposite direction. Traders can request both market and limited stop orders.

 

Immediate-Or-Cancel Order (IOC)

Traders add this order entry along with their limit orders. It tells the broker to buy or sell immediately when the market reaches the designated price. Any shares that do not execute are automatically canceled.

 

Fill-Or-Kill Order (FOK)

This order entry is the opposite of an IOC, telling the broker to either execute the quantity immediately or cancel the entire order. A FOK order insures that a trader gets the price and quantity they're looking for.

 

GTC Orders (Good 'Til Cancelled)

This order entry tells the broker to reenter the order automatically in the next trading period, if it does not execute. A trader must access the order and cancel it to erase it from further entry into the market.

 

Market-Limit on Close

This order entry tells the broker to execute at the closing bell on the exchange floor. The order will execute at the option's last bid price.

 

Market-Limit on Open

Orders with this entry will execute at the start of the auction at the option's opening price.

 

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