101Option Trading Secrets Section 7 doc

Section 7 Trading Tactics [...]... trade In the past I have lost some good opportunities by being too inflexible in my trading TRADING TACTICS Of course, there are times that you must get out of a position, especially if you are a naked writer You can try to get a good price for a minute or two, but then you must pay whatever the market will bear 226 Secret 79 HOW TO ENTER SPREAD POSITIONS Spreads can be great trades, but for most investors... vehicles, but if you are patient and quick at changing limit option prices as the underlying changes in price, you could get some excellent trade executions and pocket some of that slippage 222 Secret 77 TEST THE WATERS— HOW TO GET THE BEST PRICE There is one easy technique that you can follow to get better trade executions or better option prices when you buy or sell options When you are determined...Secret 76 ACT LIKE A MARKET MAKER One way to reduce or eliminate the cost of slippage is to act like a market maker The market makers are usually behind most option trades They usually sell at the asked and buy... the water first For example you want to buy an option that is quoted 1 at 1.3 To buy that option right now, you will need to pay 1.3, the asked price But take a minute or two to test the water Enter a TRADING TACTICS limit price of 1.15 and see if the market maker will bite You will be surprised how many times you will get your price (i.e 1.15) instead of the asked price of 1.3 If your order at 1.15... is not filled after a few minutes, you can modify your order and pay the asked price by entering a market order or limit order at the asked price Of course, the tactic probably will only work if you are trading online A postscript is necessary here When you enter an order with your broker, his floor broker is suppose to work to get you the best price However, honesty is not the best virtue on the floor,... and floor brokers can tip off the market makers to what order they hold in their hands Consequently, it is best to maintain control of your order and use the internet to negotiate your trade 224 Secret 78 YOU CAN BUY THE WORLD FOR 1/8 “You can buy the world for 1/8.” is an old Wall Street adage which means that investors will lose a major opportunity by not being willing to pay 1/8 of a point more to... lower commissions charged on the net, you can act like a market maker As a public player, you have priority over the market makers’ bid and asked prices As a result, if you set your limit price to buy TRADING TACTICS an option at the bid price and the only other player is the market maker, you will get your order filled before him The market maker does have other advantages, such as margin and low priced... spread, like buying options A credit spread is a trade where you receive a premium price when you enter the trade, like writing or selling options For example, to enter a spread where you buy an IBM Oct 80 TRADING TACTICS call at 3 and sell an IBM Oct 90 call at 1, you would enter a spread order Forget about the prices of the options Look at the differences (i.e 3 – 1 = 2) Here, the difference is 2 points... Therefore, legging into and out of a spread should be avoided in a fast moving market Nevertheless, with the speed and immediate feedback possible on the internet, such spreading tactics can work very well TRADING TACTICS Here is how to enter such trades Let’s say that you want to enter an IBM debit spread where you buy IBM April 50 call priced at 2–2.5 and sell the IBM April 55 call priced at 1–1.25 Usually... contracts We call that “10 up on a side” (One exchange suggested that they were going to 20 up on a side.) If you enter a larger order, the market makers will adjust their bid and asked price against you TRADING TACTICS As a result, try to avoid tipping your hand; enter orders of a maximum of 10 contracts at a time Once one order is executed, you can enter another Eventually the market makers will catch . Section 7 Trading Tactics