A Hot Tip on Getting Filled
Hardly a day goes by without someone commenting that they did not get their orders filled. They often ask how I seem to be able to buy and sell when they cannot. I have even been accused of having some inside connection to the market. I wish!
If I had an inside track to the market, I would not be here teaching you how to trade. Instead, I would be sitting on a beautiful beach in Tahiti sipping on drinks with little umbrellas in them, served by some of the most gorgeous pearls of the South Pacific. Trust me on that one.
The following is what often happens when the unknowing trader tries to buy a call option, for example. He/she sees the stock price rise, clicks on the ask price of, say $2.50. It does not fill but the price is now $2.52. He/she cancels and re-enters the buy price at the new ask of $2.52. Same thing, but it is now $2.55. He/she cancels and replaces the new buy price of $2.55. It happens again. And again.
This charade goes on, with the trader chasing the price up until he/she is finally filled at $2.70. Unfortunately, the fill came when the price hit resistance and started coming back down. Our trader was prepared to pay the ask of $2.50 and is now stuck with having paid $2.70, as the market is now tanking. Next, he/she looks at those calls. The price is now $2.40 and dropping. In general, you want to buy the price as it is rising, not falling.
The feeling is one of frustration, then anger, as our trader continues to watch it climb back up. Only he/she is out, having sold it on a stop loss.
Yet, I may have made the same purchase for $2.52 and sold at my target of $2.67, snagging a quick 6%. Then, I am done for the day!
Here is the trick. When you see the price of the underlying stock escalate like it does, grab that option quickly and decisively. If the ask price is $2.50, enter a buy price slightly higher than the ask — say at $2.52. That puts you at the front of the line as the call option price moves up. You stand to buy it right away as the price rises. Your instant fill also comes back, giving you time to quickly turn around and sell it for your target price. It happens quickly, and I am often in and out of my trade within a couple short minutes — sometimes mere seconds.
When I first started trading with other groups, they laughed at me and suggested that this is amateur hour and that I don’t know what I am doing. They can laugh all they want; it was me laughing all the way to the bank after making my profits off the backs of these “amateurs.”
You see, I noticed that most of my major gains were made in that first trade of the day. In addition, the euphoria of that initial move, coupled with pent up demand, most often sent call prices higher than their true value. Options traders would be chomping at the bit to enter that trade to take advantage of the rising market, thereby pushing up demand — and hence, the price of the call options. Meanwhile, I would be at the front of the line, and I would be the one grabbing the buy and selling it just as quickly. Yes, it feels counterintuitive, but it works.
The reverse is true for selling. When you see the prices drop, the astute trader will take a couple cents less in order to fill their order. It is a very ill feeling when you are stuck with an overvalued option you cannot get rid of, especially considering that theta loss is also eating away at it like a cancer.
If you want it, buy it. Plain and simple.
This is just one of the many tips, tricks and traps you will learn in our Trading Room. I discovered it while I was deep in the trenches years ago and trying to figure out exactly why I was not getting filled when others were.
If you are new to trading options, click here to join us every Sunday at 8 p.m. ET for our free Intro to Trading/Week in Review session. If you already know what calls and puts are, jump straight into our Trading Room. Click here for details.
By the way, what happened to those calls I quickly sold for $2.67? Thank you. It may have been you who bought them!
