#695 - How Does A Limit Order Work For Buying?

The "Daily Call" From Option Alpha

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “How does a limit order work for buying?” It doesn’t matter what you’re actually buying. Whether you’re buying stock or options, commodities, Forex, futures, bitcoin, it really doesn’t matter. A limit order simply limits the price in which you are willing to pay to enter that security or to buy that security. To use an options trading example, let’s say we want to buy a call option in Apple and we’re willing to pay $200 for that call option contract. We would enter a limit order that says we limit the price we are willing to pay to $200 or less. That means that if the price of the call option contract in Apple is more than $200, that order will not execute by the broker. The broker has a fiduciary responsibility not to execute that order, not to send that through at $201 or $202. It could only send it through if it is guaranteed to fill at $200 or less. Now, sometimes this means that you can get filled at a lower price. Many times, it means you’re going to get filled at the limit price that you’re willing to pay, the most that you’re willing to pay to enter that contract.

The reason I like these orders and the only reason I use them for all of our trading when we get into contracts is because I know exactly what I’m getting. I know that if the market price is $205 or $206 or $210 or it just starts to continue to go to the moon and starts to go to $250 and $270, that my order will not execute unless the price goes back down to $200 or less. And I use limit orders on pretty much everything I do for options trading, especially if we’re getting into contracts and out of contracts. Sometimes that means I have to change the limit orders multiple times and I have to kind of adjust and move and ebb and flow with the market, but I want to be in control of when my order gets filled. I do not want to use for example, let’s say a market order which is just going to fill at the next available price and that next available price could be wildly different than where the market is trading right now if there’s not a lot of liquidity and the bid ask spreads are really wide. Again, a limit order just basically tells the brokerages and the exchanges, “Look. I am willing to pay this amount and nothing more than this amount and I will only fill this contract if I pay $200 or less.” whatever your limit price is. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.