Hey everybody, it’s Michael Martin. Thanks for being here. So today I want to talk about order execution. I get lots of stuff behind say, don’t mention my name, but I wanted to just tell you about this scenario that happens a lot. And of course I’m talking about what happens when you’re trading 10 or 20 contracts of a call or a put, and there’s a 50 cents spread in the option and it’s time that you want to offset the position. You bought it, now you want to sell it. So you put an order in right at the middle of the spread between the bid ask and it sits there. What do you do? So it’s a very interesting question because the way I look at things is if you’re fighting for an extra 10 cents, it might actually cost you more money in getting that fill than just getting out.
What do I mean by that? Well, for the options players out there, you know that you’re dealing with the volatility and the momentum so that the thing gets to a point where you want to take your profits. You almost have to put yourself in the mindset that you’re just going to get out at say the sell price and not even worry about trying to improve the price. Because when the momentum stalls and the security starts to go the other way, meaning the underlying market makers aren’t stupid, they’re going to sit there and they’re going to make you pay. And it’s not necessarily intentional. I don’t think they’re being mean. They just know the market. And if you got yourself in a spot like that where it’s time to move inventory, I would say just get out. Because if you’re trying to fight for 10 cents, you might see a 30, 40, 50 cent move in the option price just because the momentum stalled in the underlying. So it’s a little bit of a trickier thing that options traders have to deal with differently than say, stock or commodity futures traders who are looking directionally and kind of can get out super cleanly. The spreads are very, very tight in this bid esque spreads of course, but with options, it’s a little trickier.
It depends on the month if you’re going further out in the expiration. So you have all these things that make it not illiquid, but certainly not as liquid as if you were trading the underlying security, for example. So I wouldn’t get cute and try to fight over five or 10 cents on the trade. And if you do the math and you think about it like say you have a put one, one put or a call and you’re fighting for 10 cents, when you think about that, when you multiply it out, it’s not a lot of money. So you kind of have to think that with options especially, there’s going to be a different level of slippage or skid, so to speak, in around how you’re not able to improve your price. Now maybe, you know, have really good sense of timing and you can do that for sure, but just remember that there’ll be a time if you act too late, it’s difficult to maybe split the bid ask from the market.
So I would definitely look at that if that’s an issue for you, and be prepared to sell a little bit more sooner than later. Because once the market stall, in my experience, the folks who are clearing your trade on the other side or the market makers, they don’t have any incentive to help you improve the price when they know the market’s already turned. And that’s nothing personal. That’s just business because those market makers are paid out of a bonus of what they earn because they’re marking things up, marking them down when they move it from inventory. So you can sell, save yourself a lot of aggravation by just understanding the dynamic of how that works. And that if you constantly find yourself in a spot where you’re putting in those types of orders and you’re not getting filled, your instincts aren’t serving you well, you’re not getting your orders in soon enough.
So you have to figure that at the end of the trade, there’s going to be a little something that you’re going to leave on the table if you don’t improve your instincts to get out sooner, right? Because if you wait for the market to turn and then you put that order in and then you expect the market maker to split the bid ask you might be inviting yourself in for a lot of frustration. And the last thing you want to be doing, let’s face it, you don’t want to be sitting in a trade for 30, 45 minutes waiting to get a fill, right? Because at that point, when it’s time to take the profits, you got to move the inventory. So for me, if I had that much money in gains and I had carry in 10 or 20 contracts, I’d probably scale out a 10 at the market for sure and see what’s happening with the rest, and then if I can improve my price or what have you.
But you know, only make your money when you actually lock in the sale. So I wouldn’t get cute with that because depending on what type of price movement you’re looking in, the underlying, you’re put in a position where you might have to act a little sooner than you might want to. So that comes up a lot for folks, especially in options because the spreads tend to be very, they can be wide there, wider than in other instruments. So that’s what I’m saying is just be prepared for your order. Maybe sell half upfront and then see about improving the rest, break up the order, see about it that way, and just don’t start to freak out if you can’t get that filled because your timing might be off and you might have to anticipate a better sense of when it’s time to leave or move that inventory for you to lock in your profits. Anyway, appreciate all the feedback on the comments section. Please like and subscribe to the channel. I’ll do my best with all the questions and the comments. For sure. Thanks for being here, folks. I’ll see you tomorrow.
Click here to get your free copy of The Inner Voice of Trading audiobook.
This is an automated transcript