There are a number of different orders that you can place when buying or selling options and this can be somewhat confusing for those that are relatively new to options trading. People often start out trading options expecting it to be a simple matter of choosing which options to buy and when to sell them. Although that is true in a very basic sense, the fact is that there are so many different orders available to options traders means things are a little more complicated in practice.
However, once you understand the concept of how options are bought and sold and how the various options orders work, things should become a little clearer. Fundamentally an options order is made up of a number of different parameters that affect certain aspects of how that order works. First, there are four main types of options of order you can use, depending on whether you want to open a position or close a position, and whether you want to buy an options contract (going long) or short sell an options contract (going short). These four types of order are buy to open, buy to close, sell to open, and sell to close.
In addition to selecting one of these main types of orders, you must also choose how those orders are filled and the order timing. There are two types of filling order: limit orders and market orders. There are several other types of order timing. You can also elect to automatically exit your position through one of the various types of exit orders. You may never need to use some of these order types, however some of them may be essential for your options trading strategies depending on what type of options trading style you are using. On this page you will find details of all the different orders and the relevant attributes, including combination orders.
Buy To Open Orders
The buy to open order is basically pretty simple, and it's the most commonly placed option order in options trading. When you want open a position and go long on a specific options contract, you would place a buy to open order to purchase that specific options contract. This order would be used when you felt the options contract would go up in value, or that you would be likely to want to exercise the option. For further details, please read the following page - Buy To Open Orders.
Buy To Close Orders
The buy to close order is also used to purchase an options contract, but it's used to close a previously opened position rather than to open a new one. If you had short sold a specific options contract and wanted to close that position, then you would place a buy to close order on that options contract. Please read the following page for additional information - Buy To Close Orders.
Sell To Open Orders
A sell to open order is used to open a position on an options contract by short selling it. If you felt a particular options contract was likely to fall in value and you wanted to take advantage of that, then you would short sell that options contract by using a sell to open order. You can find out more about this order on the following page - Sell To Open Orders.
Sell To Close Orders
The sell to close order is the second most used order in options trading, after the buy to open order. It is used to close a position that you have opened through a buy to open order. So if you had bought a specific contract and wanted to sell that contract – perhaps after it had gone up a certain amount in value – then you would use a sell to close contract to sell your contract and realize the profit. For more information, please read the following page - Sell To Close Orders.
Types of Filling Orders
To place any kind of options order you will need to use the services offered by options brokers which are stock brokers who will execute your options order on your behalf. As well as telling your broker what options order you want to place, you must also tell them who that order is filled by. Orders can be filled in one of two ways; depending on what type of filling order you use.
Limit Orders: When you place an options order using a limit order, your broker will fill your order at a price no higher (if buying) or lower (if selling) than a level that you specify. Your order will not be filled unless it can be filled within your specified parameters. When purchasing options contracts, this prevents you from buying at a higher price than you expected if they increase sharply in price before your order can be filled. If you were selling an options contract, a limit order would prevent you from selling that contract at a lower price than you expected if it decreases sharply in price.
Market Orders: If you place an options order by using a market order, you are instructing your broker to fill that order at any available price, regardless of what that price actually is. A market order is fine to use if you are buying or selling options contracts that have high liquidity and relatively stable prices. It's risky to use on options contracts that are volatile though, as you may end up buying contracts at a much higher price than you expected, or selling at a lower price: both of which can negatively affect any profits that you might make.
Types of Order Timing
You can also add timing parameters to your order by using a timing order. The following timing orders are the most commonly used and they provide your broker with specific instructions as to under what conditions the order should be filled or cancelled.
AON - All or None: An all or none order does exactly what the name describes. Essentially, it must be filled in its entirety or not at all. For example, if you are trying to buy 100 options contracts at a specific price but your broker can only buy 90 at that price then the order will not be filled. An all or none order remains open until it can be fully executed; it doesn't expire automatically, although it can be cancelled.
Day Order: A day order is an options order that must be filled during that specific trading day. If it cannot be filled before the market closes for the day, then it's automatically cancelled.
FOK - Fill or Kill: A fill or kill order is somewhat similar to an all or none order. However, if the option order cannot be completely filled immediately, it is cancelled automatically.
GTC - Good Until Cancelled: A good until cancelled order, usually referred to as good til cancelled, doesn't expire until you manually cancel it. This type of order will remain open until it is either filled or you decide to cancel it.
IOC - Immediate or Cancel: An immediate or cancel options order is very similar to the fill or kill order but with one important difference. If an options order of this type can be partially filled immediately, then it is partially filled with the remaining portion being cancelled.
MOC - Market On Close: A market on close options order is one that is filled at the end of a trading day.
Types of Exit Orders
By using exit options orders, you can automatically close an open position when certain criteria are met. Exit options orders can be used to limit losses or take a certain level of profits without having to monitor a specific position. These can be very useful for options traders that have a lot of open positions at any one time, or that do not have the time to closely monitor the markets. The following exit orders are among those typically used by options traders.
Stop Orders: A stop order can be used to close a position when a certain price is reached. For example, if you own a number of options contracts you might decide to set a sell stop order at a certain price above the current level, so that if those options reach that price you automatically sell them to take the profit you have made at that point. Alternatively, you may decide to set a sell stop order at a price below the current level so that if the options fall to that price you automatically sell them to prevent any further losses. You can also use buy stop orders to close positions where you have short sold options contracts. Stop orders can be either market stop orders or limit stop orders.
Market Stop Orders: Also known as a market stop or a stop market order, this is basically a stop order that automatically becomes a market order at the point that the stop price is hit. The position is closed at whatever price.
Limit Stop Orders: Also known as a limit stop or a stop limit order, this is a stop order that becomes a limit order when the stop price is hit. The position is only closed if the stop order can be filled within the specified limit.
Trailing Stop Orders: This is an options order that specifies a stop price that is based on a change from the best price. That change can be expressed either as an absolute number or a percentage. For example, a trailing stop order could be set to close a position if the option falls 5% below its highest price.
Contingent Orders: This type of options order is very flexible, and can basically be used to exit an open position based on your chosen parameters. For example, you could use a contingent order to sell stock options contract you own if the price of the underlying stock increases by a certain percentage.
Types of Combination Orders
A number of basic and advanced options trading strategies involve using combination orders. Combination orders are exactly what the name suggests; orders that combine two separate orders in one to coordinate the entry and/or exit of multiple positions on options contracts. There are two specific types of combination orders, described as follows.
OTO - One Trigger Other: This type of options combination order means that a secondary options order is automatically activated when the primary options order is filled. This is the most common form of combination order used in options trading.
OCO - Once Cancel Other: This combination order means that one order is cancelled when the other order is filled.
