Lesson Overview

Limit On Close Orders

If you don't have much time to trade options then using limit on close orders can help you exit your trades at a specific price near the end of the day. But there are some drawbacks, mainly that if your price doesn't hit at the end of the day you are not out of the trade. We'll dig deeper into these custom orders in this tutorial.

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  • James W

    After every trade I set up my exit trade based on your suggested exit percentages. It helps with automation and with personal accountability to stick with the plan. One thing I was thinking about with an LOC was that days frequently (not always) “trend” higher or lower. If I automate I may miss out on that trend if I hit my strike price early. I think you would say, “don’t worry about it, stick with the plan,” correct? Is there any sort of automated way to do a LOC at with a GTC timeframe? Thanks for everything.

Show Video Transcript +

In this video tutorial, I want to cover limit on close orders. This is a useful order type that you can place for both stocks and options, but we’re obviously going to focus on some options here.

But it’s a useful order that you can place to minimize the market inefficiencies and pricing that you get when you close out some orders. Limit orders: We want to talk about this first.

This is the industry standard order type for all single option spreads and stock orders. The limit price for buy orders is typically placed below the current market price and the limit price for sell orders is typically placed above the current market price.

Remember, limit orders will be filled at the limit price or better, but are not guaranteed to fill, and that’s why they’re limit. They’re different from market orders because you are limiting your entry point into any particular stock or exit point in any particular stock.

And since you’re doing that, you do not have a guarantee that you’re going to get a fill if it hits that limit point. This can be both beneficial and harmful for options trading depending on the market.

We’ve known before that the markets can move very, very fast, can move right through these orders and sometimes they get hit and sometimes they don’t depend on the type of option that you’re trading and the security. That’s why we always go for securities that have a lot of volumes, a lot of liquidity.

Limit on close orders: This is when an order that buys or sells at the limit price you set is at the close of the trading day. Remember, you must submit this order by 2:40 PM CST or 3:40 PM EST. The same risk of limit order applies to limit on close orders.

What this is doing is saying, “Mr. and Mrs. Broker, don’t enter this limit order to close the trade out until the end of the day. And if at the end of the day, the stock is trading at or below for buy orders or at or above for sell orders, then execute my order at the end of the day at that limit price.”

It pushes the closing order to the end of the day which allows you to possibly get a little bit more movement out of the market and take in a little bit more profit, but you’ll also run the risk of not being able to exit that trade at the end of the day if it’s not at the limit price.

It’s a really interesting order, it can help for those of you out there who can’t sit in front of the screen all day, and you want to get out of the trade, and you just want to place the limit order and close now and possibly get out at the end of the day. But just realize that you might have that overnight risk if your order doesn't get executed.

Hopefully, you guys enjoy these videos. As always, please let me know what other types of videos you guys want to see and make sure you share this video on your favorite social network right below.

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