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than $2 for those contracts. If the FAJ contracts are trading well
below $2, your order will just be queued up until either those
options move up and your order can be filled or your order just
expires (depending on the duration you specified). If the market
price suddenly jumps above the $2 limit order, your broker may
actually sell those contracts at the higher market price. One of
the other benefits of limit orders is the ability to cancel them
while they await execution. Since most limit orders are executed
after all market orders or the limit price may not be immediately
executable, limit orders are queued up until they can be filled.
While in the queue, you could always request a cancellation. If
the order has not yet been executed, your order is cancelled as if
you never had placed it.
- Stop Order - Your order is held until such time that the option
price reaches your specified price. At this point your order
becomes a market order and executes immediately. Suppose you
have 2 FAJ contracts in your account that you had bought at $2
premium. Suddenly you notice that FAJ's premium is falling to
$1 7/8, then $1 3/4, then $1 11/16, etc. At this point you may
decide that if FAJ falls to $1 1/2 you want to cut your losses and
sell. This is when you enter a sell order with a stop price of $1
1/2 (this kind of order is also referred to as stop loss). If FAJ
never falls to $1 1/2, your order will never execute. If however
FAJ so much as touches $1 1/2 or goes lower, your order
becomes a market order and executes immediately at market
price. You could not have accomplished this with a limit order.
If you had set a limit sell order of $1 1/2 for FAJ while they were
trading at $1 3/4, your options would have been sold
immediately as the going premium was higher than your asking
price. This of course would not have been your intention. Your
intention was to hold onto those contracts unless they fall to $1 …
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