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 314

    1/2. You could also use stop orders when buying contracts. Suppose you want to buy 2 FAJ contracts but only when they start to climb: sort of a momentum buying. So while they have a $2 premium now, you enter a stop order to buy them when they reach $2 1/2, rationalizing that if they reach $2 1/2 there is a good chance that they may go even higher. Such a buy stop order will only execute if those options climb to or above $2 1/2, otherwise your order will eventually expire. Since your order turns into a market order when the stop price is reached, there is no guarantee that your trade will go through at the stop price. Remember that the market order means whatever the market is paying. So it is possible that by the time your order is executed, the market price of those options will have changed from the stop price, for the better or worse. In high volume cases, however, you should be able to achieve the stop price.
  • Stop Limit Order - This type of order is exactly the same as stop orders with the difference that when an option reaches the stop price, your order becomes a limit order (specified by your limit price) rather than a market order. Stop limit orders are much safer than stop orders as stop prices are sometimes reached when there is upward or downward momentum on an option, and if the momentum is strong enough, buying and selling at market price may be unwise. Beware that some brokers may not offer stop and stop limit orders on options trading. Some others may require that your limit and stop price be the same.
  • Term - Just like stocks, you can specify two types of duration for your option orders. Good for day (day) orders expire at the end of day if your order has not had a chance to execute. For example, if you set a day limit order to buy FAJ contracts at $2 premium but FAJ remains above $2 the whole day, your order is

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  • Book Chapters
    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A

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