Trading options using market orders

Mark,

I learned something interesting today when taking a loss on a paper-traded position. It was a debit put spread in which the underlying never quite moved into profitable territory and, it being the eve of expiration, I submitted an order to close the position at market open on expiration Friday. (I don’t have time during the day to adjust my positions.)

There was considerable wiggle room in today’s closing bid/ask spread, and I wondered where I should set my limit order to close. Then I realized that, if I really need to get out of this position tomorrow, I probably don’t have the luxury of setting a limit order! So I decided to submit a market order instead.

This was a situation that I really hadn’t foreseen. Just as a trader shouldn’t feel compelled to hold a profitable position until expiration, he/she should be careful about waiting too long before closing a losing position. It would probably have been worth it to give up hope a day earlier and have more flexibility when exiting the trade. I definitely need to put more thought into my trading plan!

Cheers,
RD

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When trading options there are some things that must never be done – unless you truly prefer to lose money. At the top of the list is to never (under no circumstances) enter a market order at the opening of trading. Note: If you have a margin call and your broker enters that market order for you, there is nothing you can do – except to plead for five minutes to make the trade on your own.

A market order at the opening is a plea

“Please take as much money from me as is legally possible. And if it’s a spread order, please do that twice. In fact, if I am selling a credit spread, please make me pay a cash debit to exit. If it’s a debit spread, please, please make me pay more than the maximum value of the spread to get out of this trade. Thank you.”

If you have a job where you cannot take a five minute break – fifteen minutes after the market opens – that is truly a difficult situation. However, it is just one more reason not to carry risky positions.

There is another lesson in this scenario, and your comment makes it clear that you either don’t see it – or don’t agree:

It doesn’t matter whether it’s a winning position or a losing position. Your entry price was long ago and is no longer relevant. You must concentrate on the current price of the spread, market conditions, and risk vs. reward. You should be able to determine whether holding this position is a good or poor idea, and it has nothing to do with its status as a winner/loser. When it’s time to exit, exit.

One more point: Execution prices in paper-trading accounts tend to be removed from reality. It’s still worthwhile to practice the trades and risk management, but profit/loss is not going to be realistic.

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