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Why are market orders blocked for long dated options

26 Jul 2023

Are you an investor seeking quick execution for trading options? Well, market orders have been the go-to option for many, but here's a secret: when it comes to long-dated options, they just don't work. In this blog, we're going to dive deep into the reasons behind blocking market orders for long-dated options and explore alternative order types that can truly help you trade these instruments effectively.

What are Market Orders?

Let's start with the basics. Market orders are like the "fast pass" in the trading world. You give instructions to your broker or trading platform to buy or sell a security at the current market price, ensuring immediate execution. They're great for highly liquid securities and options with shorter expiration dates, but unfortunately, they hit a roadblock when it comes to long-dated options. Let's find out why.

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What are Long-Dated Options?

Long-dated options, or LEAPS (Long-term Equity Anticipation Securities), offer you the chance to ride price movements for a longer period, stretching from months to even years. They're perfect for strategic investments and hedging, offering flexibility and the potential for substantial returns. But here's where the plot thickens.

What are the Limitations of Market Orders for Long-Dated Options?

Market orders for long-dated options face some tough obstacles.

First off, let's talk about liquidity. Long-dated options don't attract the same trading volumes as their near-term counterparts, resulting in wider bid-ask spreads. That lack of liquidity makes it a tough task for market orders to be executed promptly at fair prices. 

But that's not all. Long-dated options have limited available contracts, which means finding a buyer or seller can be like searching for a needle in a haystack. So, when you place a market order, you may end up with unfavourable execution prices and slippage that erodes potential profits or magnifies losses. 

What are the Risks and Concerns Associated with Market Orders for Long-Dated Options?

Let's not forget the risks. Long-dated options, with their extended expiration period, expose you to increased price volatility. Imagine trying to hit a moving target blindfolded! Predicting accurate execution prices becomes a challenging feat. Executing a market order provides minimal control over the actual execution price. That means you're vulnerable to sudden price movements that can dramatically impact your profitability. It's like riding a roller coaster blindfolded with no seatbelt!

What are the Alternative Order Types for Trading Long-Dated Options?

Now that you know the pitfalls of market orders, it's time to explore alternative order types that you can use. Meet the limit orders. These orders let you set specific buy or sell prices for options. You have more control over the execution price, but remember, there's no guarantee of immediate fulfilment if the set price isn't met. It's like placing a bet with a backup plan.

Stop orders can also come to your rescue when trading long-dated options. They automatically enter or exit positions based on predetermined price thresholds. It's like having a guardian angel watching over your trades, ready to act when the price reaches a certain level. Smart, right?

Strategies for Trading Long-Dated Options:

Trading long-dated options is an art. It requires careful planning and strategy development. Consider factors like market conditions, volatility expectations, and risk tolerance. By incorporating alternative order types into your trading strategies, you can optimise your chances of obtaining favourable execution prices and managing risk effectively. It's time to become the master of your trades!

Conclusion

So, there you have it, dear fellow investor. While market orders are great for many scenarios, they simply don't cut it for long-dated options. The unique characteristics and challenges of these instruments, including liquidity issues, supply-demand imbalances, price volatility, and lack of control over execution prices, make alternative order types your best bet. By understanding these limitations and employing the right strategies, you can navigate the complexities of long-dated options successfully and enhance your trading outcomes. So, gear up, embrace the alternatives, and conquer the world of long-dated options like a true trading maestro!

 

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