When placing an order for options or stock, should it be a day order or a good til cancelled?
When entering a position, we usually use day orders. We are trying to enter at a specific event, and a good til cancelled (GTC) will trigger whenever the stock hits that point. On breakout plays, that can work well. But let's say your stock is starting to make the move, but you are trying to work a half point spread to save an additional 1/8. The stock can run away from you, and then fall back after the run and have your GTC triggered. You have to keep up with them. Indeed, many times we will have our brokers cancel an order immediately if the stock moves away from us (you can also do this with a 'fill or kill' order). In sum, we are usually right on top of our entry positions-the key part of the trade-so we don't need GTC's.
Another point. We never use market orders. Watching the time and sales log after the close on CMGI tonight illustrates why. We were watching the stock price steadily rise. You would see it fall back a half point on a sell order, and then resume the rise on the buy orders. We saw trades at $227, $227.62, etc. All of the sudden you see an order go through at $221, then they jump right back up to where they were. What was the $225 order? A market order. Market makers have two minutes to fill market orders. We have seen it time and time again: the stock is trading higher, and then a sale or buy comes in way out of line with the current price. If the stock traded at that price within the last two minutes, a market order runs the risk of getting filled at that price. We saw trades well below and well above the vast majority of trades going through. Investors getting poor fills on their market orders.
If a market is moving fast and you want to get out or get in, we will put a limit order a quarter of a point ahead of the stock. The limit says we want to get filled at the stated price OR better. If the stock is trading at a better price, we will get it. That way we can get filled without having the stock run away from us.
That brings us to a final point. When entering a position, work the spread, but don't miss out on a great play over 1/8 of a point. We used to fret over that 1/8 until we missed a couple of $20,000 trades over 1/8 per option. Yes, we work the spread, but we do it intelligently by looking at the buy and sell pressure and shaving off a reasonable amount. When you are trying to make 50 cents, the 1/8 is huge. If you are trying to make $15, 1/8 is insignificant. It all depends upon the trade. For covered calls on long-term stocks, we fight like mad-we are not going to be in that long and we are not trying to make the home run. On a breakout of a powerful stock that you think can run $20 points, getting into the play before the stock runs away is the key, not that 1/8. It is all a matter of perspective.
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