Options trading involves opening and closing positions all the time right. And since the markets can turn on a dime, there are many times when exiting a position quickly becomes necessary.
But before you can even be comfortable getting in and out of orders you have to know what tools you have at your disposal. That's what I'm going to cover here.
Getting Into a Position – The Basics
There are really only 2 basic order types to establish an options position.
A market order executes at the current "retail" or market price. No bargains here, just quick entry at the next available price.
A limit order executes a trade at a particular "price" or better that you set. The price is manually entered by the investor, and if it is not met, the order does not fill.
Getting Into a Position – Advanced Techniques
For more advanced traders, there are other options (no pun intended). Even though these may seem more advanced, they really aren't once you know how they work.
A stop limit order executes the order when the investor's price is hit, but limits how high to buy, or how low to sell. This is another great risk management technique, but you could miss your trading window entirely if the price moves too quickly.
A trailing stop order adjusts with the market price, and "trails" it by a certain investor specified percentage or amount. This type of order leaves the trader poised to take advantage of sudden market corrections.
A trailing stop limit order allows the trader to specify a cap on the possible loss, without capping a possible gain. This is the best of both worlds but again you risk completely missing the entry if the market moves too fast.