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Compared to other forms of trading, there are subtle differences in how options trades are done. Are there any such differences in how trades are executed?
How long will it take to sell or execute options?
Options take milliseconds to sell/execute for most market orders. However, limit orders will remain unexecuted for as long as it takes the market to reach the strike price.
Some market orders may take up to one minute to execute for large orders if the liquidity pool is thin.
As long as the stock is widely traded and on one of the major indexes you should be able to sell it immediately if you set a market order. If you set a limit order halfway between the bid and ask price on a highly traded stock it will typically sell within a minute or two.
In the rest of this article I will try to cover all you need to know about the speed of execution in options trading. To see the most popular books about trading options just click here.
Execution in Options Trading
Technological advancements over the last few years mean that most traders now enjoy high-speed options trading from wherever they may be. All the brokers in the market today work with liquidity providers to provide lightning-fast execution in a fraction of a second for all active market orders.
Active market orders are trades you intend to execute immediately at the current option/underlying asset price. Once the order is executed on any broker’s platforms, it’s completed and settled within a few seconds.
Barring any network disruptions, you’re unlikely to give much thought to the length of time it takes to execute market orders as it will be instantaneous.
The situation is slightly different for limit orders. With a limit order, you’re expecting the market to reach a specific price before taking your position or selling it. The position won’t get executed until the market reaches the price you’ve set.
For a sell limit, you have to wait until the market reaches an upper price barrier which you’ve identified as the level you’re willing to sell the option. You’re expecting the underlying asset price to continue rising until it has reached the area you identified.
The opposite is true for a buy limit. You expect the underlying asset price to decline from its current levels to a lower price. Your options position can only get triggered once that price level becomes the actual market price.
Now, each time you set a limit order, there’s no telling how long it will take for the market to reach the price you’ve set.
The chief determinants are the distance between the limit price and the current market price and the overall underlying asset volatility. You could wait for a few hours or weeks for the price to be reached.
However, once the price is reached, your trade will get executed immediately.
Large Order Execution and Liquidity
In most options trades, the broker has to match options sellers to buyers. All the parties exist in a pool managed by liquidity providers.
For most small orders, finding a counterparty for the position is often straightforward. In some cases, the brokers internalize the orders. However, for an options position worth hundreds of millions of contracts, it can get tricky.
It may take a little longer to fill out such large orders, even when a broker works with some of the largest liquidity providers. If you have such a large account, you may get slippages as the broker takes a few more seconds to route your order.
You’re also much more likely to witness partial fills at intervals.
Owners of such high-value accounts try to avoid this problem by seeking arrangements with liquidity providers. White label opportunities may give them direct access to the liquidity pool, cutting off the middle man (brick and mortar brokers).
However, improving your connection to liquidity providers is only half the equation. There’s no guarantee that you’ll find counterparties to your large position immediately, so partial fills can still happen.
A good way to reduce the risk of partial fills and improve execution speed for large orders is to only trade during high-volatility periods.
You’re likely to get faster execution on positions entered at the peak of a trading day compared to those entered during the middle of the day when there is less trading going on.
Best Execution In Options Trading: Market Orders Vs. Limit Orders
We’ve established that options are executed almost instantly for market orders while you have to wait for the price to reach your limit order and convert it to a market order.
Which of these approaches works best in options trading?
The Argument for Market Order Execution
With a market order, your position is executed immediately based on the prevailing prices. There’s no risk of missing out on a position as you can enter the market in your intended direction immediately.
You also don’t have to worry about getting left behind due to partial fills.
However, with market order execution, you’re likely to be affected by wide spreads. Your position will be filled at the bid or ask, depending on whether you’re buying or selling. If the spreads are too wide, you could lose a sizable portion of your intended profit on the position.
Let’s assume you intend to buy a call option at $2, hoping that it will reach $2.40 for a 20% profit.
Wide spreads can fill your purchase at $2.20 if you use market order execution when spreads are too wide. If the market reaches your initial intended target on the trade, you’d have lost 50% of your profit.
So, the best way to use market orders is to make sure spreads are under control before you execute your position using a market order.
The Argument for Limit Orders
With limit orders, you’ll get filled at a price you’ve determined. Wider spreads rarely affect the trade negatively.
So, in our example above, the broker will fill that position when the market price is at $1.80 to account for the wider spread at the time of execution.
Traders using limit orders have a better handle on their risk/reward calculations. You’ll get the exact return you had in mind with a position.
Using limit orders also helps you target psychological levels, support, and resistance, etc., with your trading. Strong reactions are often most common at these levels.
However, using limit orders requires a great deal of patience. You have to sit and wait for the market to get to your target price, missing out on the intermediate moves before your target price is reached.
Secondly, your analysis may be rendered inconsequential since wide spreads can trigger your position earlier than planned. If you have a large account, you also have to worry about partial fills.
It doesn’t take very long to sell/execute options. Most market orders are executed in less than a second. If you’re getting excessive delays in execution and you’re sure you have stable internet, you should look into changing your broker.