We’ve all been there. You put in an order and you’re not getting filled! You modify the price once, twice, thrice, and still no fill! Are you doing something wrong or has the market gone mad?! We’ve compiled some information that might shed some light on why you might be having trouble opening or closing a trade:
Remember, when it comes to getting filled, liquidity is KING! One of the most important elements of options trading, liquidity trumps all. Most issues with order fills are the result of liquidity problems. There’s nothing like being in a winning trade you can’t get out of. Losing trades are even worse. Good liquidity means favorable closing prices. Poor liquidity could hurt you bad.Here are some telltale signs of poor liquidity:
Wide Bid Ask Spreads
Bid-ask spreads are usually the first indicator of liquidity. The wider the bid-ask spread, the more difficult it will be to find a favorable price. Chances are that there is also little to no volume. Simply inputting the mid-price will most likely result in a hanging order, unless there is some considerable price action. As a reference, the most liquid options have a spread as narrow as a penny. [option chain graphic w/ order entry spread]
No Bid, aka No Buyers
It’s hard to sell something when there are no buyers. If no one is bidding for what you are selling, you won’t get it off your hands. A simple way to see whether or not your option has buyers is to look at the bid. You typically encounter this issue with far out-of-the-money options, especially those nearing expiration, that you want to close out. The no-buyer issue has the potential to affect almost every options strategy, especially spreads (verticals and iron condors).
Entering the order at Mid-Price
Mid-price is not a guaranteed price, but rather a reference for price discovery. The wider the bid-ask spread, the less likely it is that an order put in at the mid-price will get filled. If you’re curious as to how mid-price is calculated, here’s the formula:
Mid Price = ((Ask-Bid) / 2) + Bid
To learn more about Liquidity, then please visit our friends at tastytrade by clicking here.
Remember - the only thing you can control is order entry. Happy trading!