When a stock you are following meets your buy criteria, what kind of order do you place with your broker, limit or market?
We have discussed in the past that we do not use market orders-we usually end up with poor trades. Indeed, I cannot recall when I ever received a 'good' trade on a market order. That is why we always limit our orders. If the market is moving fast and we really want the position, we will set a limit ahead of the price-that way we can help avoid the stock just blowing past us and may still get a trade that is inside the spread. The limit order says you will buy the position at that price OR better. If the price is better at the time, you will get the better price. Still, we often try to get in the spread on most of our trades, and we are usually successful.
The heart of the question goes to the situation where we are not at our desk or are at work and our criteria are met. If we have instructions with our broker that we want to buy option X when the underlying stock hits the buy criteria, how do we convey to our broker what price we want to buy at? After all, even though we may have a rough idea of where the option will be by use of the delta, it is not exact. What we usually tell our broker is that we want to buy a specific option when the stock hits a certain price at a certain volume. Then we instruct our broker to place a limit order in the spread at a point where it appears that we will have a good chance of being taken out. For example, if the spread on the option is $1, that might be one-quarter of a point inside the spread.
Usually, our brokers can reach us-cellular phones and office phones are usually close at hand. Some brokers may be queasy at first if they cannot confirm instructions to buy-they may want you to fax them signed instructions until your relationship is better. That is okay.
Still, we prefer to do our trades live and in person. We want the market moving the right direction. We want things to be just right when we are committing our money. That is why we always prefer a call from our broker and then confirmation on a trade before we get off the phone. Sometimes we will place an order in the spread and then just wait. That happens when the stock is not racing up, but has hit our buy point. We usually do not, however, just let an order sit if the stock runs away from us. Why? Because reversals do occur in this market, and if we have an order hanging out there and the market reverses, we don't want to be taken out on the way down. We would rather let the stock regroup and start back up and catch it on the upswing than to be underwater right off the bat.
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