Imagine that you have been planning a trade. You researched the company, performed excellent due diligence, and decided that you are going to go long and purchase some call options.
You place the limit order for your contracts at the right price, and look forward to the market open tomorrow.
9:30 rolls around, the stock price jumps, you were right! But you check your account and the order didn’t get filled. How did it not get filled? You were right about the stock.
Let’s start with understanding why some orders are not filled.
How Brokers Manage Orders
Once a trader places an order, it goes to the broker, who must decide how the order will be routed, and who will fill, and ultimately execute it.
The broker may send the order to the trading floor, which can result in an execution delay since human traders are bidding on the contract.
If the broker has the contracts available and decides to fill the order internally, then they can complete the trade in-house and profit off of the spread. This will result in a fast order execution.
If the broker is not able to complete the trade, then they may send it to a third-party market maker who can fill the order and will pay the broker a fee for the opportunity.
If you place a limit order, there is a chance it will not be filled if the price of the contract is not reached. On the other hand, a market order will be filled, but it may not be at the ideal price. The broker must take this into consideration when deciding how to execute the order.
As a trader, you have some protection provided by the SEC that mandates brokers to give the best order execution available. If your order is not filled, then there may not have been an agreeable price for the contract you are trading.
If many traders have the same idea, and they submit very similar orders, the chart of the security may “gap,” which means have a discrepancy between the charted price and the actual price.
This gap can cause the price to jump past your limit order before it is able to go through. For example, if XYZ Corp. 8/15 $47.00 Closed at $1.55, and you set a limit order for $1.58, but it opens at $1.62, then many people probably put the same order in, which caused the price to gap.
Low trading volume can prevent orders from being filled since every order needs a buyer matched with a seller. Blue-chip companies and other large corporations typically have plenty of volume throughout the day. Smaller companies do not have as many shares outstanding, and thus do not have as many options contracts available to trade.
This is especially common if you place a large order on a contract that typically has low volume. One way to work around this is to place smaller orders instead of one large order. That way, some of the orders can be filled, even if there is not enough volume for all of them.
Most trading volume is right after the market opens (9:30) and just before the market close (4:00). Institutional investors, high-frequency traders, and professional investors place most of their orders at the busiest parts of the day, since they have the largest orders.
Big traders tend to slow down around lunch-time, which may be an ideal time for you to place some orders, since they will have a higher chance of being filled.
Adjusting Quantity of Contracts
Many clients place orders in multiples of five, such as 5, 10, 15, and 20. Lots of other traders are placing orders with the same quantity of contracts, which can work against your trade’s fulfillment since the brokerages are trying to fill the same orders for multiple traders.
Try adjusting your quantities down to odd numbers like 3, 7, 9, or 11 to increase the odds the broker is able to fill your order. Institutional buyers and other large investors trade enormous lot sizes, and utilizing these odd number orders can enable your trades to be bundled with other contracts.
Brokerages view these orders as “one-off.” For example, one trader may place an order for 4 contracts, and if you place an order for 6 instead of 5, then the two orders may be bundled as an order of 10.
Avoid Round Number Pricing
The price you enter for a contract is treated similarly to the order size. Round numbers like $200, $150, and $25 are used by the big traders.
Use prices such as $23, $62, $199, etc. because the broker is more likely to match you with someone near your price, instead of ignoring your order in place of a larger one.
Changing the price can be an effective strategy to achieve the fulfillment and quantity of contracts that you want.
Utilizing the Optimal Order
When you place an order, you want it to go through, but you also want to ensure you pay the right price. The last thing you want is to place a market order thinking that you will get a contract for $3.25, and realize that it went through at $4.00.
By combining limit and stop orders, you can set a wider range to ensure that you get a price that you want, but not at the risk of overpaying for the security.
Limit orders go through when the option reaches a predetermined price or better.
For example, an investor wants to purchase a call option for ABC Inc., which last closed at $2.33. ABC Inc. is scheduled to release earnings this week, and you want to lock in the option under $2.40 because you think that they will beat the earnings expectation.
You can submit a limit order at $2.40, which will go through as long as the price does not go above $2.40 at the open.
If you want to ensure that an order goes through, a stop order can be a great decision. A stop order turns into a market order once the stop price is reached.
Let’s say that you want to buy an OTM put that closed at $0.65, and you set a stop price for $0.68. Now imagine many other traders placed similar orders because of a prevailing bearish sentiment on the company. Once the market opens, the contract may jump to $0.70, which will turn your stop order into a market order.
As you can see, stop orders can be excellent for getting into a position; however, there is a risk that you will get stuck with a price that is much higher than you were anticipating. In the same example, the option may open at $0.80 or more due to events that took place overnight. Your order would still go through, but you may pay a much higher premium than you had hoped for.
By combining Stop and Limit orders, you get the best of both worlds. Setting the stop ensures that your order gets through, and the limit order prevents you from paying more than you want for the trade.
With our example above, we can set a stop price for ABC Inc. at $2.35, and a limit price of $2.42. This would give us a wide range where the order will be filled anywhere between these two prices, but it will not be filled once the price exceeds the limit.
Combing orders like this is especially effective for securing a position in a high-volume trading session. Your order can be filled in a scaled manner, with some contracts purchased on the low-end of your range, and some on the higher end.
Tying it all together
Remember, option prices can be extremely volatile, and if you are trying to enter into a position at a favorable price, you may need to wait. The market open can be a frenzy of activity where your order can be overlooked.
If you rush your trades or start using too many market orders, you could sacrifice potential profit.
Once you decide on a trading strategy, map out how you will set up the trade. Ask yourself if many other traders are implementing the same strategy. If you think that there is a chance that your order may not be filled as-is, tweak the price, adjust the quantity, or try placing the order after the high volume in the morning.
Just because your order wasn’t filled, does not mean you have lost the opportunity to trade that contract. By utilizing the tips outlined in this article, you should be well on your way to more efficiently executed orders.