This thread is intended to be a guide to placing and executing open/close orders on options contracts.
When trading options, you can know every trend and candlestick pattern, but still fail if you're not familiar with getting orders filled properly.Promote
Everything contained in this thread will be strategies based on personal trial and error. I've had many errors. Ideally these tips can help you avoid them.
Just like any of my edu content, I would encourage you to take the things stated here, and build your own set of rules.
1. Bid/Ask Spreads
We're all familiar with starting a position red. But it doesn't have to be that way.
The options chain will reflect the "mid-price" between the bid and ask as the current price. However, it is often hard to execute an order at this price.
You will find that some tickers will fill options orders at the mid-price, while others will only fill if you slap the ask. It puts you in a tough situation.
But this is a component of the risk/reward in options trades that people often overlook.
To start, you can choose to only trade options with very limited spreads while avoiding ones that have wide spreads.
Here's an example with 2 names in the same sector (Chinese EV's) $NIO & $XPEV:
Before reading further, try to interpret the data here. Both are 2 strikes OTM.
First thing I notice is the wild difference in bid/ask spread.
$NIO is 1.18 bid / 1.23 ask $XPEV is 1.78 bid / 1.96 ask
If you slapped the ask, you're immediately "down": $NIO: -2% $XPEV: -4.6%
You may get a slightly better fill, but this is worst case.
Why are these prices so different?
Take a look at the volume and OI. There's a reason that $SPY contracts trade in 1 cent increments, because of their liquidity.
$NIO is far more liquid than $XPEV, while translates to wider options spreads.
Additionally, $XPEV has a higher Implied Volatility, which will increase the prices of options across the board, calls or puts.
Pick stocks that have small price spreads, be selective, and do not settle for something that immediately sets you up in a poor position.
Look for volume. Where the volume is, you should be, especially with options.
I use @unusual_whales to help with this process. I utilize the "Hot Chains and Tickers" menu to show tickers the most commonly traded options.
This is usually my main focus. There's a reason that I check the volume regardless of the direction the play could go.
Calls are naturally more liquid than puts. Often, bears will sell calls. Bulls buy calls. This often leads to lower liquidity in puts.
I use the Intraday Analyst page on Unusual Whales to just show me where the volume is. I usually don't care if it's bullish or bearish.
Volume means liquidity which means smaller bid/ask spreads. Find stocks with liquid options chains and go from there.
Additionally, psych numbers such as $5 increments will usually have more volume even if it is more OTM. For example, $TTD 115c below:
2. Analyzing Different Situations
In the example above you'll notice that there are different quantities on the bid/ask. This can be a great indicator for when to buy and when to wait. In the $NIO example:
1.18 x 1 bid / 1.23 x 31 ask
There is more supply than demand.
Why would I buy the ask now when I know there are tons of contracts waiting to be sold?
In this case I would notice the supply of contracts and either place a bid at 1.18, or take a slightly higher bid (1.19-1.20) if I wanted a quicker fill.
Suppose someone market sells a number of contracts, the 1.18 bid would be eliminated and the bid would likely drop to around 1.15. 1.18 would surely be close to the mid-price after a couple ticks down.
When buying a pullback, limit buys below the mid-price often get filled.
A good deal of contracts on both the bid & ask. The mid-price would be 1.88. I notice that there is more demand than supply given the amount on the bid. I would be comfortable bidding slightly above the mid-price here.
Knowing that there is supply to back me up, I would be fine with contracts at 1.90 and a mid-price of 1.88. The chances of getting a fill here is low if the stock moves upwards.
However, a could downward ticks will likely ensure a fill on the mid-price.
There is no need to rush this process. If you miss a fill, just let it go. It's a lot better than buying at 1.96, getting knifed, and selling into a 1.50 bid 2 minutes later.
This situation is still far from perfect. As these spreads can tighten.
Often times I will wait for the demand to build up with a limited a very limited supply on the ask.
If I was waiting for a better situation, here is my opportunity.
I can place a bid slightly below the ask, but that is unlikely to be filled. In this case I would lean toward an entry at 1.96, knowing that continued upside would greatly push the value of this contract given the current demand.
These contracts are almost identical in volume/OI/IV/spread/price.
You can see that there is supply on the calls and demand on the puts. Without even looking at the chart I can tell you the close on $CHWY was probably bearish.
Suppose this is intraday. How would I play it?
I would be very hesitant to buy calls given the supply, I would likely wait for the bid to build up before bidding slightly above the mid-price.
If I believe a downside move is coming, I will bid for puts, knowing there is demand.
If these spreads tighten (which they often do), I will use this same analysis process to determine my entry.
Ideally I would see this on the 68p:
1.83 x 85 bid 1.90 x 10 ask
Great example of a comfortable situation with demand to support you.
3. Stop Losses
I use market stops almost exclusively. I use Webull for options trading. In my experience, stop losses are triggered base on the input "stop price" becoming the mid-price. This does NOT mean that your stop price will be the bid.
This is where limit stops can be dangerous. You are not guaranteed to be filled. If there is a certain price I want to make sure I get, I will set a market stop slightly above that price so that my desired sell price will be the bid.
