My 2018 primer, Selling Options...Simply Called and Simply Put, targets 3 groups: investors that are new to option trading, Series 7 exam students, and stockbrokers who passed Series 7 but lack good understanding of option trading (for 8 years, I was one of them). But this blog is helpful to investors and stockbrokers with all levels of option trading experience. My posts offer a pithy, first person style that I have used since 1995 to lessen their option trading angst.
Saturday, September 1, 2018
To sell (& buy) options, I prefer market orders, & rely on "price improvement."
Many traders say, "too much risk of getting jabbed when using market orders to trade options...especially with big spreads...always use limit orders." But I use market orders most of the time. With limit orders, I fear missing the trade to save a few pennies. I use Fidelity Investments & Fidelity's price improvement has been a gigantic benefit. (Full disclosure: I retired from Fidelity Investments in 2017.) Here's what I mean: On 7/20/18, I sold 12 contracts of the TLT (US Treasury ETF), August 17, 2018, $119 (covered) call, at the market, & received a $2.21 premium. A $2.14 BID & (around) $2.25 ASK was displayed before my trade. As the seller, I was entitled to receive the $2.14 BID. The buyer was obliged to pay the $2.25 ASK. I could have placed a $2.21 limit order, but I didn't want to miss the trade. The market maker wanted that 11 cent spread, & if I requested $2.21, I was asking them to nick their take to 4 pennies. I was extremely trusting of Fidelity's trade execution & price improvement reputation. With my market order, I was really asking Fidelity to get the market maker to better my price. If I received $2.14 (or less ["jabbed?"], which could have happened), fine; I wanted the trade executed. I know that Fidelity invests a ton of money into trade execution technology & market makers keenly want Fidelity's business. On my trade, the market maker agreed to accepting a lower spread & I received $2.21. That's price improvement of 7 cents. 12 contracts control 1,200 shares; at $0.07, that's $84 in price improvement. On my account's balance page, Fidelity reports my rolling 12 month price improvement: $1,062 in my rollover IRA among my 53 trades. I've linked a Barron's story. It's 3 years old, but serves as a good primer. Barron's, price improvement
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Awesome Dave! Looks like you are as good of a trader off the field as when you were on! [I know you like those sports analogies.]
ReplyDeleteIt is truly a well-researched content and excellent wording. I got so engaged in this material that I couldn’t wait to read. I am impressed with your work and skill. Thanks. Copart Market Maker In Lagos
ReplyDeleteThank you Laura & pardon my late reply to you. You might enjoy today's post. Don't hesitate to comment or share. Retired from Fidelity for 4 years & missing work a bit, I'm considering teaching option selling.
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