Entries & Exits
Market orders are trade orders that are placed at the next available market price. We never suggest using these orders as a general course of business because the next price could be dramatically higher or lower than you might be willing to accept. Therefore, we always suggest using limit orders.
In this video tutorial for market orders. And let’s get right into it here. Market orders are a little bit different than your traditional limit order. Typically, most people are going to enter trades or stocks with a limit order.
But with a market order, you guarantee that you’re going to get executed. Limit orders, you don't necessarily have a guarantee. You have a guarantee of a price because you name that with a limit order.
But with a market order, you guarantee an execution, but you don't guarantee a price or a time. What a market order does is that it fills you at the next possible market order. The benefit of this is obviously that you're assured in execution.
You’re going to get into the market as soon as humanly possible. But the risk is that market orders have no control over what the price is.
Since you’re going to take the next available price, that price could be higher or could be lower than what you want it or you expect it and that’s just the risk that you run.
Now typically, market orders can be fairly good if you're in a market that is very high liquidity, lots of options trading, lots of stocks trading. You just want to get into the market and you’re going to have minimal slippage which is the difference in pricing to the price of the market.
Usually, options and stocks with a lot of volumes and open interest and a lot of trading activity, you’re going to be fairly okay with market orders because you’re going to get filled pretty quickly at fairly close to the actual price of the option.
In markets where there is not a lot of volume, I would highly, highly suggest that you stay away from market orders because you could get filled at very, very ridiculous prices. It could be higher or lower than what you expect you wanted to pay.
Let’s actually take a look at my Thinkorswim platform here as always and let's say that you're trading Google. Now, Google is a very highly liquid and fairly highly traded stock and then fairly highly traded option as well.
Let's say that you actually wanted to trade some of the January 2012 Google call options. You come in here to the call side which is the left hand side of the option pricing table. And let's say that you're really bullish on Google and you thought it was going to go up to $600. It’s currently trading at 599.
But you’re going to buy a call on Google. You just want to get into the market, it’s moving so fast that you don’t even have time to put in a limit order. We’re going to simply click the “ask price.”
The price right here is irrelevant because we’re going to change the actual order type to a market order. You can see we have all these different choices. In our videos here and our tutorials, we cover all these different choices of order types.
But since we’re going to change it to a market order, watch how this price point goes away completely. There’s no longer a price that I can adjust manually.
And now, it goes to an MKT and it has this squiggly line which means that you’re going to be executed at the next available price. Whatever the next available option is going to be trading at, that's the price you’re going to get into.
Now, remember that we’re trading these 600 strike call options on Google. Now right now, they're trading at 24.40. Since you’re entering a market order, you’re hoping that you’re going to get in at 24.10 and you may get in right at 24.10, but you also may get in a 24.20 or 24.30, you also may get in at 24 even and get in at a little bit better price, but it’s the next available price.
Now, this works on the same when you're selling an option or selling a stock as well. If we’re selling our Google call that we already own, if we already own the 600 strike call, then we’re going to sell the next available price.
If we’re really hoping to get 24.10, then maybe we want to put a limit order in to make sure that we get that. But if the market is moving so fast and so violently that we just want to get out of the position and take whatever profit we can get, then we might enter a market order and that’s going to execute us at the next available price.
Hey, thanks for watching this video from Option Alpha. As always, we invite you guys to come back and check us out at optionalpha.com. And if you like this video, please share the video with any of your friends, family or colleagues on your favorite social network.
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