Options Order Categories

There are four basic categories of orders, revolving around buy or sell orders, combined with open or close orders.

1. Buy to open. The trader initiates a long premium position. Straight call and put purchases fall into this category.
2. Sell to open. The trader initiates a short premium position. Naked put selling is an example of this category.
3. Sell to close. The trader closes the long premium position initiated in 1 above.
4. Buy to close. The trader buys back the short premium position initiated in 2 above.

Trading hours for equity options are 9:30 AM. to 4:02 P.M. eastern time. The trading hours for index options are 9:30 AM. to 4:15 P.M. eastern time.

Generally, all bids and offers as reflected on brokers' quote screens are for market orders up to ten contracts. Larger orders and limit orders may run a risk of a "partial execution," in which only part of the order is filled. The ten-contract rule (sometimes called the "10-up rule") may vary by exchange, market maker, and the liquidity of any given option. Currently, almost every option is quoted 10-up, with an increasing number of options quoted 25-up, or even 50-up or more. Orders are of several types, as elaborated next:

1. Market and Limit Orders. When you place an order to purchase an option, the order is entered either at the current market price or at a specified limit price. Market orders take precedence over limit orders. A market order to buy will be executed at the lowest available selling price, generally the asked price. A market order to sell will be executed at the highest available buying price, generally the bid price. For example, if an option is currently bid at 1 and asked at 1 1/8, and you place a market order to buy ten contracts, your order will most likely be filled at 1 1/8. Likewise, if you place a market order to sell ten contracts, your order will most likely be filled at 1. A broker will typically confirm the execution of your market order during the same phone call. You should understand that in fast-moving markets, prices can change, sometimes significantly, between the time you place your market order and the time the floor fills it. With a market order, you are certain that you will be filled but you are uncertain of the price of this fill.

   A limit order to buy is an order to purchase at a certain price or lower. A limit order to sell is an order to sell at a certain price or higher. For example, if you place an order to buy 10 XYZ January 100 calls at a limit of 2, you are willing to pay up to a maximum of 2 points for each option contract. If the XYZ January 100 calls are bid at 2 1/8, asked at 2 3/8, your order will not be immediately filled. Limit orders that cannot be immediately executed are generally placed on the specialist's order book or the public order book (depending on the exchange) for potential execution should the market move toward the limit price. If you place the same order (to buy at a limit of 2) when the XYZ January 100 calls are bid at 1 5/8, asked at 1 7/8, your order will likely be immediately filled at 1 7/8. Remember that a limit order to buy means you are willing to pay that price or lower-the market maker or specialist is obligated to fill your order at a lower price if it is available. With a limit order, you are certain of the price of your trade but you are uncertain as to whether your order will be filled.

   We recommend that you always place a limit price on entering options positions, as you don't want to "chase" a trade by overpaying. When closing out positions, it is sometimes worthwhile to place market orders to exit quickly. All market orders are placed for the trading day only (day orders). Market orders will always be filled unless the trading is halted in the underlying stock. Limit orders to buy or sell can be good-till-canceled orders (which remain active until canceled) or day orders.

2. Good-till-Canceled and Day Orders. Theoretically, good-till-canceled (GTC) orders can remain on the trading floor's books forever or until the option expires. However, there may be limits to the time period such orders can be maintained, sometimes as little as one month. Check with your broker for specific rules on the life of limit orders. The disadvantage of GTC orders is that a trader may forget the order has been placed; an additional disadvantage of GTC option orders is that they may be executed at very unfavorable prices, particularly on a "gap" move in the underlying stock. Many brokers will send a written reminder stating the name of the security and the quantity and price specified for each open limit order. Day orders are either filled during the trading day for which they are placed or expire at the end of the day. We generally recommend placing limit orders as day orders, good for the day only.

3. Stop-Limit and Stop-Loss Orders. Stop-limit and stop-loss orders are used to exit a position if a certain price level is breached. They are generally used to protect a long position by setting a sell level below the current market price. The options exchanges generally do not accept stop orders on options. However, some individual brokers may accept stop orders on options in-house, so check with your broker for further information. These so-called "desk-stops" are placed at the customer's risk. The broker agrees to watch prices for the customer on a best-efforts basis but usually cannot be held responsible for bad or missed fills. For these reasons and because the options market is so fast moving, I do not recommend placing stop orders in your options trading. You should instead allow time to eventually stop you out by determining in advance how long you will be willing to hold a long option position.

4. All-or-None Orders. To avoid a partial execution on market orders for more than ten contracts or on a limit order, an all-or-none restriction can be placed on your order. These are accepted only on day option orders; they are not accepted on GTC option orders. Again, check with your broker for house-specific rules and regulations. You should think carefully about the use of an all-or-none limit on an order. Suppose you are trying to exit a 20-contract position and you enter an all-or-none sell order at 5 where the bid is for ten contracts. The market drops to 4, but your order doesn't get filled. Would you be happier holding all your options at 4 or would you be more pleased having sold half of your position at 5?

5. Contingency Orders. Your broker may allow contingency orders to be placed on your trades. A contingency order involves a conditional situation that must be met for an order to be filled. For example, if you are long one XYZ January 115 call, you may instruct your broker to close the option position at the market price if XYZ closes at $120 or higher. Your order to sell the option is contingent, or conditional, upon XYZ reaching a price of $120 a share. Not all brokers accept contingency orders, and those who do may limit the type of such orders they will accept. In some cases, individual brokers may accept contingency orders, even unusual ones, on a "not held" basis, meaning that they are not held responsible if a fill does not occur.