The Options Market Place - Types Of Orders

Investors can enter various types of orders to buy or sell options. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific price or condition under which the investor wants their order to be executed. All orders are considered “day” orders unless otherwise specified. All day orders will be canceled at the end of the trading day if they are not executed. An investor may also specify that their order remain active until canceled. This type of order is known as “Good Til Cancel” or “GTC”.

Market Orders

A market order will guarantee that the investor’s order is executed as soon as the order is presented to the market. A market order to either buy or sell guarantees the execution but not the price at which the order will be executed. When a market order is presented for execution, the market for the option may be very different from the market that was displayed when the order was entered. As a result, the investor does not know the exact price that their order will be executed at.

Buy Limit Orders

A buy limit order sets the maximum price that the investor will pay for the option. The order may never be executed at a price higher than the investor’s limit price. While a buy limit order guarantees that the investor will not pay over a certain price, it does not guarantee them an execution. If the option continues to trade higher away from the investor’s limit price, the investor will not purchase the option and may miss a chance to realize a profit.

Sell Limit Orders

A sell limit order sets the minimum price that the investor will accept for the option. The order may never be executed at a price lower than the investor’s limit price. While a sell limit order guarantees that the investor will not receive less than a certain price, it does not guarantee them an execution. If the option continues to trade lower away from the investor’s limit price, the investor will not sell the option and may miss a chance to realize a profit or may realize a loss as a result.

FOCUS POINT!

It’s important to remember that even if an investor sees options trading at their limit price, it does not mean that their order was executed because there could have been orders ahead of them at that limit price.

Stop Orders / Stop Loss Orders

A stop order or stop loss order can be used by investors to limit or guard against a loss, or to protect a profit. A stop order will be placed away from the market in case the option starts to move against the investor. A stop order is not a “live” order; it has to be elected. A stop order is elected and becomes a live order when the option trades at or through the stop price. The stop price is also known as the trigger price. Once the option has traded at or though the stop price the order becomes a market order to either buy or sell the option depending on the type of order that was placed.

Buy Stop Orders

A buy stop order is placed above the market and is used to protect against a loss or to protect a profit on a short sale of an option. A buy stop order could also be used by a technical analyst to get long an option.

Sell Stop Orders

A sell stop order is placed below the market and is used to protect against a loss or to protect a profit on the purchase of an option. A sell stop order could also be used by a technical analyst to get short an option.

Stop Limit Orders

An investor would enter a stop limit order for the same reasons they would enter a stop order. The only difference is that once the order has been elected, the order becomes a limit order instead of a market order. The same risks that apply to traditional limit orders apply to stop limit orders. If the option continues to trade away from the investor’s limit, they could give back all of their profits or suffer large losses.

Securities Institute - Securities Exam Training

Other Types Of Orders


Related Articles
  1. Professionals

    Types Of Orders

    Investors can enter various types of orders to buy or sell securities. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific ...
  2. Professionals

    Types Of Orders

    Investors can enter various types of orders to buy or sell securities. Some orders guarantee that the investor’s order will be executed immediately. Other types of orders may state a specific ...
  3. Professionals

    A. Introduction: Trading Securities

    Investors, who do not purchase their stocks and bonds directly from the issuer, must purchase them from another investor. Investor-to-investor transactions are known as secondary market transactions. ...
  4. Professionals

    Order Types

    NASAA Series 65: Section 17 Order Types. In this section market order, limit order, stop order and stop limit order.
  5. Investing

    How To Start Trading: Order Types

    The types of orders you use can have a large effect on your trading performance, so understanding the different order types is important to your success.
  6. Professionals

    Types of Securities Orders

    Securities Orders
  7. Professionals

    Orders

    Orders
  8. Forex Education

    Intermediate Guide To MetaTrader 4 - Order Types

    Traders have the option of placing different order types using the MT4 platform. Market OrderA market order is the most basic type of trade order and is used to buy or sell a security at the ...
  9. Forex

    Entering A Trade

    The importance of executing the correct orders
  10. Professionals

    Transacting Securities

    FINRA Series 6 Exam Study Guide - Transacting Securities. In this section: Long and Short Sales and Types of Orders with different characteristics and costs.
RELATED TERMS
  1. Bracketed Buy Order

    A buy order that is accompanied by a sell limit order above the ...
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  3. Bracketed Sell Order

    A sell order on a short sale that is accompanied (or "bracketed") ...
  4. Above The Market

    An order to buy or sell at a price set higher than the current ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop ...
  6. Order

    An investor's instructions to a broker or brokerage firm to purchase ...
RELATED FAQS
  1. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
  2. What is the difference between a stop and a market order?

    Learn about market orders and stop orders, how they are used and executed, and the main difference between stop orders and ... Read Answer >>
  3. What's the difference between a market order and a limit order?

    Buy and sell trades with market orders at the present stock price and execute limit orders if the stock price falls within ... Read Answer >>
  4. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
  5. How do I place a limit order online?

    Learn how a limit order is placed, the types of stocks it is most useful for and the specifications placed with it to suit ... Read Answer >>
  6. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center