With the holidays coming up – the last thing you want to do is be chained to a computer, waiting for your next trade opportunity…
That’s why today, I want to talk to you about the three types of orders that can allow you to score profit no matter where you are.
Here’s what I mean…
Your #1 Question – Answered
As you know, I like to go through my inbox and answer some of your most pressing questions…
And the one I found below is a great question – and an extremely important one!
“Hi Tom, I’m in most of your services and am one of the lucky ones to get a lot of trades from you every week. But I work full-time and it’s hard for me to sit in front of my computer… is there an easy way to place an order and automatically set your exit at the same time?”
You know by now that timing is everything…
The problem is… Most traders feel like they have to sit in front of their computers all day to nail their perfect entries and exits. But I’m sure you’ve got MUCH better things to do with your time besides staring at stock prices and charts all day – especially as we head into the end of the year AND holiday season.
On top of that, while computerized trading systems can work for some people, this type of trading doesn’t necessarily give you the full picture – and it doesn’t work for everyone. Fortunately… you can watch your trades and spend your well-deserved time at the beach – without even looking at your computer.
And it all boils down to these three little orders…
1. The Limit Order
A limit order is an order to buy or sell a security at a specific price (limit) or better. In the world of options, you would use this order to limit the price you pay to buy or sell an option – either to open or close an options trade.
Here’s an example…
Say you’re looking at a September $35 Call option with a bid price of $3.50 and an ask price of $3.40. You believe the stock is poised to go higher, but your strict money management rules tell you that you can’t spend more than $3.50 per option contract (remember that one contract lets you control 100 shares of the stock).
You already know that a market order leaves you vulnerable to whatever the current price is or what the market maker prices the option for… so you’re stuck with whatever price they fill you at the moment they decide to give it to you. And in a fast-moving market, where prices are constantly running amok, this option premium can easily pop up from $3.50 to $3.70.
Now you may think a mere 20 cents more for a trade isn’t an issue. But here’s why I caution you against chasing the trade….
Think of chasing an options trade like speeding. You may feel pretty comfortable exceeding the speed limit by a mere five miles per hour (mph). After all, it’s only five mph, right? But you may soon feel compelled to push the speed limit by 10 mph… and the next thing you know, you’re flying down the road and putting others’ lives – and yours – at risk.
I know this may be a bit dramatic, but the point here is to keep your discipline. The more and more you chase after trades, even if just by pennies, the more you place your money – and your money management rules – at risk.
But if you place a limit order for $3.50 or better instead, you will not spend any more than $3.50 to get your trade filled. What’s “better” is that you can’t spend over $3.50, but you can certainly spend much less. For example, you may get your trade filled at $3.40 or $3.30. In this case, any price lower than $3.50 is better. So you will either pay your specified price of $3.50, or you will pay a “better” price that is anything lower than $3.50.
You can also use the limit order when you are trying to close an options trade. Let’s say you own that September $35 call at $3.50, and the stock price ran drove the value of the call option to a bid price of $5.00 and an ask price of $5.20. You can use a limit order to exit your position and lock in your profits at a specific price or better – just as you would use a limit order to open a position.
(Now, if you’re just getting started, make sure to check out my instructional video on how to choose your broker and open up your trading account. It may seem overwhelming at first, so I’m here to break it all down, step by step. Click here for more…)
2. The One-Cancels-Other (OCO) Order
A one-cancels-other order is a pair of orders where, if one order is executed, the other order is automatically canceled. This is a type of limit order that allows you to manage your options trades – whether you’re in front of your computer screen or not. An OCO order allows you to manage your position at any time for the duration of your trade (until expiration) without having to physically be there when the option hits your target or limit price.
Using an automated trading platform, this order allows you to have your account electronically place one order and cancel the other automatically. This type of order is primarily used when you have open positions, but you can’t be in front of your computer to manually enter and cancel orders.
We’re going to look at an example of an OCO order on an options order using the AAPL Oct $110 Calls for $5.00. Remember, these examples are to show how each order type looks and are not trade recommendations of any kind…
Now let’s say that you want to double your money on these calls, but you don’t want to risk more than 50% of this trade. This means that you’d want to have a limit order to close and a stop order to preserve your capital.
In this example, you’d want to sell the option to close at $10.00 or close (stop out) the order at $2.50. You would place the two orders simultaneously on one order ticket. If the stock trades at $10.00, the account knows to automatically sell-to-close your position at $10.00. And it will automatically cancel that $2.50 stop order.
It also works the other way in that if the computer automatically sells the position to close at $2.50, it will also cancel the other $10.00 sell-to-close order.
3. The Contingent Order
This is one of my favorite type of order. A contingent order is where you place two or more transactions at the same time (such as buying a stock and selling a call option at the same time). Like both orders we’ve already discussed, this type of order allows you to be in two places at one time. So you can tend to all the things in your life and still have some control over your open options positions.
The basic premise of using a contingent order for your open options position is that you can sell-to-close your options when the stock hits a specific price.
Let’s say that you’ve got an October $40 Call option you’ve been sitting on and that the price of the stock when you opened the options trade was $43.50. If you have an options risk graph, you can use it to anticipate the theoretical value of your option if the stock price moved higher. And if you don’t, then you can at least place an order to sell that call option “contingent” upon the stock hitting a higher price.
You would place the order through your automated trading platform as an advanced order type – specifically a contingent order. You would set the contingent order price to be triggered at the last, or latest trade so far that day at “greater than or equal to” the price you specified.
When the latest or last trade so far in the day (not the last trade of the day at market’s close) hits the price you specified or higher, the order to sell your position will be executed as a market order – since not even computers know what the price will be ahead of time.
You can place a contingent stop order as well. If you feel that a support price on a stock will get broken and cause the stock to drop big time, you can place a contingent order to sell your position contingent upon the stock’s trading price. It will trigger on the last price at “less than or equal to” the price you specified.
Plan Your Trade, and Trade Your Plan
Over time, you will come to appreciate one type of order over another. A lot of it will be dictated by your personality type, how busy your life is, and whether you have the time you want or need to monitor your positions throughout the trading day.
So you’ll want to find the order types that work for you and hang your hat on it as part of your overall trading process. This will give you an even higher likelihood of success because you have taken care of the planning aspect of trading.
And I want to say just one last thing…
Even if you can spend time in front of your computer watching, in real time, what’s happening in the markets and every price fluctuation, you may want to consider using these order types where they’re auto-executed. Now it may be challenging to see an option getting close to your stop price without closing it too early, but chasing a trade can cause you to not only lose money, but miss out on future gains.
That’s why having your trading plan in place ahead of time, knowing when to take your money and run, and setting up your automatic trading platform can make your life so much easier – and so much richer.
And the types of orders we discussed today should help you adhere to a trading mantra that has served me – and many trading pros – very well…
And when it comes to picking your strategy, well, that’s where I come in.
I’ve got thousands of lucrative ideas when it comes to deciding how to follow a play. But if you’re looking to cut down on time you spend on your phone or computer and start truly enjoying your life, you’ll want to see what I’ve been up to right here. I’ll give you a hint – this fast cash method can hand you a chance at up to three “paychecks” every single Friday… click here for more.
Good Trading,
Tom Gentile
America’s #1 Pattern Trader
