How to Price and Trade Options: Identify, Analyze, and Execute the Best Trade Probabilities, + Website

CHAPTER 8 Executing Your Trades

One of the topics in options trading that you will read and hear the least about is trade execution. Though each trading platform has its own particular traits when it comes to trade execution, there are a few principles that permeate all platforms and are essential for you to understand if you are to be successful. Trade execution is one area where novice traders often give up the most edge in their trading. For example, if you are trading SPX options and the calls you want to sell have a bid/ask spread that is $1.40 wide, how do you proceed? For example, suppose the calls have a market with a bid of $5.60 and an offer of $7.00; do you sell the calls at $5.60? Do you try to sell the calls at the midprice of $6.30? Or do you choose a different price entirely? Or, as many traders choose, do you avoid the underlying altogether due to the width of the spreads?

Before digging into this, let’s reiterate that learning to get the best price out of your trade execution is far more important than getting the best commission structure from your broker. Yet many traders will leave their broker and run to a cheaper broker just to save 25 cents per contract. Now, I am not saying you should not get the best rates you can, as controlling costs is important to the profitability of any business. And you should run your trading activities as a business. But if one broker does a better job filling your orders in between the bid and ask prices, that may be a far ...