Maybe another way to put it is this. A limit order is a short option, unless you execute immediately, from a theoretical point of view it makes more sense to sell an option as you get paid to wait. Practically, transaction costs make the decision less straightforward. Meaning when you post a limit order you are giving someone a free option.
I guess selling options instead of using limit orders isn’t free money, rather it’s not giving away money you would otherwise by posting a limit.
^ This.
BChad, are you telling me that if I sell Apple when my Bloomberg says $425, that I might get a significantly lower price than that?
Look, go ahead and use a market order if you like. When I first started doing trades on my own, I was influenced by Alexander Elder’s books, where he points out that you should always trade with a limit order to cut your risk of a market order being filled badly. You can use stop orders (or puts) to guard against unexpected disasters, but when you are opening or closing a position based on an established discipline, use limit orders over market orders. Now, he has shorter holding times than I generally do, so it’s more important to his kind of strategy, but I got the lesson. Why take the risk of a badly filled market order if it’s not necessary?
And I do believe that HFT algorithms are looking for ways to fill you at the worst price they can get away with. At some point, they will figure out how to squeeze more out of market orders. There is at least some risk control with limit orders (balanced somewhat by the risk of not getting filled, of course).
I see LPoulin’s point about “why sacrifice premium if you could do the same thing by selling a put for a buy or a call for a sell and wait a bit.” I guess for me the usual thing is that when I make trades, I want my exposure to match my model allocations, and so I’m thinking a little less about the exact price and I’m less willing to wait to get filled, and I’m thinking more about how my portfolio’s beta and alpha components are lining up - ATM options have a delta of around 0.5, so as the price of the underlying moves, your portfolio beta goes more wacky. But I do see where he’s coming from and wonder if there’s a way I should change my strategy there.
CFAvMBA - use the bear call spread to avoid the situation where you are unable to re-buy a soaring stock cheaply. It wil cut into your profit compared to just the covered call, but will let you sleep better.
I used to use market orders, never again. I remember a number of times a few years back (and once is too many) where I put in an order to sell a stock when it was at say 42. Somehow, the order was filled at a horrendous price that I was never able to actually observe (eg 39, 40 or so.) That’s when I started with limit orders. Imagine if someone puts in a limit order to buy at 40, and an idiot like me puts in an order to sell “at market”. Do you think these guys AREN’T going to pair us off if they think they can get away with it? Hopefully this has all been stopped by now, but it left a bad taste. Here’s a hint: http://www.reuters.com/article/2012/11/03/etrade-review-idUSL3E8M28CC20121103
This fcking market is off the hook! Order will be placed today. I’ll catch some gains plus a premium then reallocate.
Much Love.