Investors employ various strategies in trading, among which are deep in-the-money (ITM) index options. When it comes to executing trades for deep ITM index options, market orders are often blocked. Let’s first understand what these are and then decode why.
Market orders are commonly used, and often the default choice, by traders to execute trades quickly and at the prevailing market price. These orders prioritise the speed of execution, ensuring that the trade is executed immediately at the best available price in the market. Market orders are particularly beneficial for highly liquid securities where the bid-ask spread is relatively tight, minimising the impact of the execution price.
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Deep ITM index options are options with a strike price that is significantly lower (for call options) or higher (for put options) than the current price of the underlying index. They are characterised by a high delta (nearly 100%), which means they move almost in tandem with their underlying asset. Hence, traders are attracted to deep ITM options for direct exposure to the asset's price movements.
While deep ITM index options offer profit opportunities, they come with certain risks, including:
In light of the above-mentioned risks, some brokers block market orders for deep ITM index options. The motive is to protect traders from the adverse effects of market orders. It ensures that they have more control over their execution prices, which reduces the likelihood of executing trades at unfavourable prices.
To have better control over your execution prices and reduce the effects of illiquidity, you can employ the following alternative strategies:
Deep in-the-money (ITM) index options offer significant profit exposure but also come with inherent risks that must be carefully managed. Considering the risks associated with deep ITM options, assess whether they align with your investment objectives and risk tolerance. Furthermore, while market orders are typically blocked for deep ITM index options, you can employ alternative strategies to mitigate these risks.