The Various Stock Order Types

A sell limit order is used by an investor who wants to sell. The investor sets a limit price, which is the minimum price that the order will get filled at. Limit orders are preferred when bid/ask spread are wide.

Because option prices have much wider bid/ask spreads, an investor buying and selling options should generally use limit orders instead of market orders. It is also important to trade only liquid options. Not all available options are liquid. One can determine the liquidity of an option by its bid/ask spread (more so than by volume and open interest).

The bid/ask spread of a near at-the-money option in AAPL is about 10 cents. A bid/ask spread of 10 cents or less is considered liquid for underlying assets that have a price of $100 or less. Options of more expensive assets will naturally have wider bid ask spreads, in terms of cents.

With limit orders, an investor can specify additional conditions, such as “Day," “Good till Cancel," “Fill or Kill," “Immediate or Cancel," and “All or None."

With a Day order, the order will cancel at the end of the day if it cannot be filled. The “Good till Cancel” order will remain in effect until the investor cancels it. This does not literally mean forever, however. If an order does not get filled and investor does not cancel, most brokers will automatically expire the order after some time (for example, around 180 days).

“Fill or Kill” means that if the order cannot be filled in its entirety immediately, then it cancels the whole order. “Immediate or Cancel” is similar ,except that it cancels any portion of the order that cannot be filled immediately. This allows for the possibility for orders to be partially filled. For example, if an investor orders to buy 200 shares of GE, it is possible that only 50 shares end up being purchased.

“All or None” means the investor wants either the whole order to be filled, or not at all.

Stop Loss Order 

Investors use stop loss orders to prevent further loss, or to prevent a loss of profits. Suppose an investor bought 20 shares of Johnson and Johnson (JNJ) at $144 and it is now currently trading at $152. In order to not lose this profit, the investor places a sell stop loss order to sell 20 shares at $150. The stop loss price must be lower than the current price.

If the price of JNJ ever drops down to $150, the order will trigger and 20 shares of JNJ will be sold at market price, which could end up being slightly higher or lower than $150. If volatility is high and the bid/ask spread is wide at the time, the filled price can be somewhat different than $150.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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