Tuesday, October 23, 2007

Use limit order when you sell to close option contract

Few months ago, I start to learn investing option thru various sources. I make my first purchase back in sept (check it out) and result has been very rewarding so far. The more I understand and trade option, the more I view stock as riskier business. I 'd devote more of my energy and capital in fine-tuning my option method in the next few months. Tonight, I want to share one of the idea I learnt when I sell option. It is a bad idea to use market order when you sell to close option contract because you never know what exact price your broker offer you. The spread (difference between bid and ask) could be huge and you may end up not making much profit if your broker offer you a low bid price as your sold price. The better way is use limit order. You enter a price in between the bid and ask as your sold price. Your broker may not be able to sell it for you right away, but the advantage is that you know exactly how much price you sell for and your bottom line profit. This is my real life example of a option I just bought for $2.00 per contract
Bid : $2.10
Ask: $2.40
As you can see, the spread is $0.30. If I put a market order , I'd be most likely get a sold price around $2.10. This means my profit is only 5%! Not too attractive. Instead, I put a limit order with a price $2.30. The order didn't go thur immediately. It takes about 2 hours. But I 'm able to make 15% return of investment once the order executed.

4 comments:

MangoPudding said...

congrats on your handsome return! May I ask why you didn't set your limit order to 2.4 to increase your profit?

Unknown said...

wow, interesting? my question is how do you determine what price you are going to sell before the contract expire?:)

529pm said...

Mangopudding
the chance for the order get executed will be reduced if the limit order price is more toward the ASK. If order never excuted, no profit can ever be made. From my past experience, the order usually get executed pretty well (few min to few hours) if I put in between the BID and ASK.
Charlene
That's a good questions. I believe there are more systemtic way (or signal) to see when to sell and run. For my case, I'm pretty satisfied if I see my investment grow 15% in few trading days.

Unknown said...

Wow, cool. I learn more today, thanks