Is it Really a Bad Fill?


I heard that it wasn’t a great idea to place long-standing limit orders to close out spreads, as it allows market makers to gauge the market (at your disadvantage) and that conditional orders were better. What are your thoughts on that?


I want the fill. Trying to gain an advantage over the market makers is of no concern (to me). This is especially true when I am bidding 20 cents to exit a short credit spread. All I want to do is exit, lock in the profit and eliminate risk. Nothing else matters.

I hope the market maker takes advantage of my order by selling the spread when I am bidding too much. If I change the order, how much better can I expect to do? Another nickel? For me, it’s ‘no thanks.’ I prefer to exit and find a new trade.

Other traders prefer to earn as much as possible from the current position. Nothing wrong with that. It’s a choice: Hold out to earn a little extra (and it is just a little) here or find a new trade with much better potential profit.

When I enter an order to open a new position, it’s not quite the same. This is when the market maker can take advantage of a poorly priced order.

I prefer to set a limit price, but use no other contingencies. I want my order filled, and if the market moves, making it more attractive to the market makers, then I have a better chance to get filled. To me, that’s a good thing.

Consider a situation in which you enter an order to sell a put spread at a limit price. When the underlying asset moves lower by enough that you expect your spread to sell, what do you do? And what should you do? Leaving that order untouched is surely the best way to get filled. However, with the stock falling and implied volatility increasing (most of the time), it’s easy to feel that you can get, and deserve a better price for the spread.

Thus, the dilemma

If you change the limit price, it’s possible that you will not find anyone to take the other side. This is something that many rookies don’t understand. Your order is not just filled by happenstance. Someone must be willing to trade with your order and take the other side. If you ask too much, no one will buy.

The problem is that the ‘other side’ (probably a market maker) also wants a good fill. When you ask too much and he/she bids too little, there is no trade. I’m pleased when the market is moving to make it more likely my order gets filled.

Deciding on whether to change the order is a psychological problem – with no single best solution.

So I ask? Is it really a bad fill when your order is executed when you may have been able to get another five or ten cents?

Sophisticated traders want to trade only when there is an edge. Who can blame them? If you have no edge, then you don’t a high probability of earning a profit. But if you need an edge – by selling the spread for more than it’s worth, who is going to take the other side of the trade? Traders who demand an edge understand that, and are willing to trade less often. However, they always make ‘good’ (at the time of execution) trades.

I go the other way. I want my position and to get it I recognize that I must give up some edge – at least edge based on the current market prices. The problem is estimating how long to wait patiently before raising the asking price.

Lessons of a Lifetime. My 33 years as an options trader contains some insights, philosophy and lessons I’ve learned. This is not a trading book.


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2 Responses to Is it Really a Bad Fill?

  1. rluser 03/11/2011 at 12:15 PM #

    An excellent question by Joe. I like your answer, Mark. While camping on a price to buy back those short spreads may give up some edge to other market participants by assisting in price discovery, it may also provide edge to the camper. Consider what happens with a volume surge (perhaps a single large order). The market maker may well be willing to give up some of his edge in order to lay off some risk. If that longstanding order looks ‘good enough’ to the market maker you can end up with a great fill.

    • Mark D Wolfinger 03/11/2011 at 7:52 PM #

      Good point.
      I never expect a gift, but if you do not enter an order, you have no chance to receive one.