Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 313

    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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