Options Trading Orders
Whether on an exchange or over the counter, options dealers provide two-sided quotes for options contracts. The two sides of the quote are the following prices:
- The bid price, the highest price a dealer is willing to pay for a particular contract.
- The ask price, the lowest price for which the dealer will sell it.
The distance between the two prices is known as the spread, and it is within the spread that the actual premium for the contract will be auctioned or negotiated.
To buy or sell an options contract, you will place an order with your broker. Options orders are very similar to those for stocks. Most common are market orders, which direct your broker to execute the options trade at the most favorable price available at the time. Other types of orders are designed to make you less vulnerable to the will of the market.
A limit order is an order to buy or sell an option at a specific price or better. Your broker will only execute the trade if he or she can do so within the price restrictions you have established. A stop order directs your broker to execute the trade once the contract has traded at a given premium. Because stop orders are executed in the order in which they are received, the market price for the option may have changed from the stop price by the time your order is actually executed. Stop orders may be day orders, good only for the day on which they are placed, good-'til-canceled orders, which you may continue indefinitely, or may contain any other kind of time limit you set.
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