Whether you're buying or selling to open, there are a few different ways to enter an options trade. Today, we'll discuss two commons types of orders investors can place with their broker, as well as the advantages and disadvantages of each.
Market Orders and Limit Orders
One such order traders can place with their broker is called a market order . Options players use market orders when they want to buy or sell a security as soon as possible at its current market price.
Conversely, traders place a limit order to specify a determined price at which they are willing to buy or sell to open a stock or an option contract. Thus, until the security's price falls within the price range outlined in the limit order, the transaction will not occur.
Market Orders Guarantee Speed, But Not Precision
One plus of market orders is that they offer a greater chance of the transaction being completed. Another advantage of the market order is speed, since there aren't any restrictions on the entry price -- though the timing and size of the order, as well as the stock's liquidity, all impact the transaction's execution.
However, market fluctuations that occur between the time the broker receives a market order and the time the trade is fulfilled can have a significant impact on the cost of entry. If a security's price is moving rapidly, a trader loses control, and can end up paying a much steeper-than-expected price on the position. This can often translate into higher breakeven points and decreased profit potential.
Limit Orders Grant More Control, But No Guarantees
Limit orders are beneficial in that they give investors more control over their entry and exit prices on the trade, making this type of order fulfillment the more "disciplined" approach in terms of money management.
Traders placing limit orders are not guaranteed a completed transaction, however, since there's always a chance that the security's price won't fall within the price range outlined in the order. Plus, even if the security falls within the determined price range, there may not be enough liquidity in the stock to fill the order -- once again, risking the transaction's successful completion.