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 …