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                 

3 comments:

  1. 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.]

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  2. It 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

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  3. Thank 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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