Why You Underestimate The Power Of Order Spreading vs Bundling

order spreading

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Chances are that when you place a trade you send everything into the exchanges in one, big order?

Bundling all of the options you want into one order because, well, that's the easy way to do it.

What you may be missing is that by doing this you might actually be putting yourself at a disadvantage. And although it may be easiest to send orders in like bundles of wood tied together, you could be losing out on the long run.

"Micro Order" Filling Strategy

To my knowledge, I've never heard anyone use this term to describe the strategy. But it's been something I've done for years when entering a position and it goes a little something like this. . .

Your goal is to sell ten call spreads in JPM for example. Currently, a single call spread is trading for $1.50 per spread.

Sure, you could go ahead and enter the big order for ten spreads now at $1.50. Chances are that your order will take some time to fill given you have to find a willing buyer on the other size for such a big order. During that time, the market can move up or down around your pricing.

If after a while you still aren't filled, you decide to move your price down to $1.45 and within another 15 mins you are filled.

But was this the most optimal pricing? What if the market moves higher from here? Questions start circling.

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Spread Orders Out Over Time

Rather than place one big order, spread your targeted options trade out over time. For example, place an order for 1-2 call spreads now and see how quickly they fill first.

Are there buyers at the initial price of $1.50? If so you should get filled rather fast.

Then continue to place blocks of trades, 1-2 spreads at a time, into the market. Reach for better pricing and see if it hits or not. Who's to say that there isn't a buyer willing to pay $1.55 out there somewhere if only for one spread?

Of course, this takes a little more time and effort but the benefits are glaring. . .

1) Cost Averaging

By spreading orders, you have the ability to cost average down/up should the market move against your position as you are building it. Over the course of the day, you may enter some orders at $1.50, some at $1.60 and others at $1.55.

Now isn't this better than one chunk at $1.50 and hope that was the best price?

2) Quicker Fills

Depending on the underlying security, you are trading the smaller contract sizes might fill quicker. Bigger lots take more time to route and process, leaving you both exposed to price changes and delayed in getting into the trade.

By using smaller lots, you also get a feel for the market appetite for your spread or strategy.

3) Market Flexibility

Likewise from #1 above, if the market does move the way you wanted it to after your first entry you have already locked some profits in and are in much better position to add more or adjust your strikes.

With this micro order approach, you have the flexibility to move with the market and adjust your position as you put it together.

Next Steps. . .

Add your comments below and let me know if you've ever tried this strategy of order entry before? Have you found success doing it or not?

If you haven't tried it before, then give the micro order strategy a try this week and see how it works. After, head on back here and let me know what worked and what didn't for you?

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.