Lesson Overview

The Cost of Slippage

You’ve often heard us talk about the important of trading liquid options until you are blue in the face right? Well today we’ll put a dollar figure to this concept and show just how much “slippage” is costing you trading options that are illiquid.

Specifically markets that show a bid/ask spread of just $0.20 could end up costing you more than $3,840 each year - and that’s just the cost of getting into or out of the trade!

As traders we focus too much on our commission costs and rarely if ever do you “feel” the pain that slippage costs your portfolio. It’s time we stop worrying less about commissions and more about slippage by focusing on only highly liquid options and underlying stocks.

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  • I mean specifically the full purchase or sale order (all contracts) and the full exit order (all contracts).

  • Felipe Lujan

    I am not following why is it that I would lose money when I am mostly an option seller. If I am options seller, all I am selling is the premium which is not costing me any upfront cost except for the commissions that I am paying to enter the contract. Let’s say I sell a credit spread for $50 and collect the entire premium once that contract expires, how is it that I am losing money due to slippage? Would you rather say that instead of “losing money” you are giving up an additional gain? I would love an explanation on how exactly this works because it is driving me crazy. Thank you.

    • Let’s say the spread is .50 wide. Buyers can buy at 1.50 and sellers can sell at 1.00 (bid/ask). The mid price where trades might get filled is 1.25 so if you fill at 1.25 and you still collected $125 but you could have collected $150 on the highest end so you’re opportunity cost is lost because of slippage. Make sense?

      • Felipe Lujan

        Yea it makes sense in the way that it is more of an opportunity cost ( meaning I could’ve made more money but I only collected a certain amount of premium). What was driving me crazy was the fact that I thought it was an actual cost that I would incur and I would not be able to notice due to it being unnoticed. It totally makes sense that we should trade in liquid markets so that we are able to move in and out of trades quickly as needed. By the way, I purchased your watchlist so that I can browse stocks that have high IV ranks, etc. it is safe to say that those stocks listed on the watchlist are high liquid stocks right? Thanks so much, Kirk!

      • Yep we pre-screen for long-term high liquidity but always check the individual strikes and months.

      • Felipe Lujan

        Awesome! Thank you so much for all of your support! I’ve learned so much thanks to you

      • Very welcome

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