The world of online options trading can be fast-paced, requiring traders to dedicate a significant amount of time and attention to planning their moves and executing them correctly, using the right timing for entries and exits. A big piece of the puzzle, however, is using the right order types; otherwise, you could be missing out on prime opportunities or incurring unnecessary losses.
Using order types that are appropriate to the situation that traders find themselves in can help, over time, with improving precision, in addition to enacting consistency with risk management and strategy. Once you understand how Limit Orders, Stop Orders, and OCO (One-Cancels-the-Other) Orders work, you can begin experiencing more success in the options markets, keeping ahead of volatility that could derail your trading plan.
Learn how to control your trades like a pro by mastering options order types for smarter entries and exits, and by understanding different types of trading orders.
Why Order Types Matter in Options Trading
In addition to the strategy that comes with your current trading plan, order types function as a form of strategy and can help traders make key decisions when they’re managing the positions in their portfolios. Choosing the right order type is choosing the right execution for the trades you’re currently managing, and knowing the difference between these three choices can be the difference between a dynamic, robust plan and one that is either lackluster or loses you money.
Before we dive further into our guide, let’s touch lightly on the core function of order types in volatile options markets:
- Trade Execution Quality: Each trade type has its own objective in ensuring that trades are executed to the highest possible quality. Market orders are all about speed and execution as quickly as possible, limit orders are designed to execute at the best price, and stop orders can be used to trigger trades once certain price levels are hit.
- Risk-Reward Control: Traders can use the right kinds of order types to ensure that their gains outweigh their losses with each position they trade. Achieving the right risk/reward balance can be done well when using the stop loss order, which we will discuss more later on in our guide.
- Emotionless Trading: Using any of these three order types can take a lot of the busy work out of trading, as well as manage some of the decisions where traders could be tempted to act out of their emotions. Letting market orders capture quick execution, limit orders fill at the best price, and stop orders trigger certain trades when a price level has been reached can automate a lot of the system around a trading plan and not emotional reactions.
By using each of the three main order types, you are achieving a good blend of control, performance, and automation that can keep you on the winning side of each trade more often than not, and to actively manage each position without dedicating too much time to the process. If you’re interested in learning more about some of the rudiments and simple principles of options trading, we would encourage you to read more on Options Trading Basics.
Limit Orders—Precision Over Speed
Limit orders guarantee the price a trader establishes, but they don’t guarantee speedy execution in every case. This is due to the fact that the price might not be reached at all, or there’s a lack of liquidity in that part of the market, and there aren’t enough shares available at that specific price. Traders who are looking for the best speed should consider market orders, but precision and price control are best found with limit orders.
What Is a Limit Order?
The limit order in options trading is a simple directive to buy/sell at a specific price or better, which prioritizes the precision of each trader over execution at the best possible speed. There is a time to be quick, but having limit prices on the high end and low end of each trade offers much in the way of control.
Using limit orders comes in especially handy when you’re seeking price protection in an environment where there are wide bid-ask spreads. Traders can leverage a “buy limit” to ensure their traders are executing only at their current limit price or lower, while a “sell limit” can be used to execute the trade at their current limit price or higher.
When to Use Limit Orders in Options
- Entering a New Trade: Limit orders are super useful for those entering trades with favorable pricing (e.g., wide bid-ask spreads). To achieve the ideal entry point for a new position, traders shouldn’t be chasing a premium, but should instead set a firm entry price and use the limit order to see it through.
- Exiting Profitable Trades at Target Premiums: When a trader’s calls or puts hit a favorable price, limit orders can ensure that they capture their target price and can exit the trade profitably.
Pros and Cons
Pros
- The biggest thing going for limit orders is the precision they offer in trade execution. Limit orders are instrumental in helping traders avoid overpaying or underselling.
- Price protection is another perk of the limit order. These orders are designed to limit losses that could arise from unfavorable price movements.
Cons
- Limit orders don’t ensure speedy execution, and they may not fill if the market skips your price.
- Limit orders can completely miss fast-moving trades because of the emphasis on precision and price protection.
Real-World Example
You place a limit order to buy a call at $1.50 when the ask is $1.80. A limit order should be placed around $1.65, and the order won’t execute unless the seller is willing to pay that price.
Stop Orders—Automating Your Exit Strategy
Traders can consider the stop order to be their first line of defense when they’re dealing with market volatility. When a certain price level has been hit, stop orders can either trigger a market or a limit order. They work wonders when traders are looking for the best setup for exiting a current position.
What Is a Stop Order?
Stop orders are a risk management tool and a conditional order that becomes a market order when the stop price has been reached. What happens then is that the market order is executed at the best available price. It’s important to keep in mind, however, that market volatility can make it so that the execution price might not be the same as the stop price. Stop orders are ultimately designed to protect against losses or lock in gains.
Three Common Variants
- Buy Stop Order: When traders are selling shares that they don’t own, they can use the buy stop order to limit losses and to possibly profit from a price increase.
- Sell Stop Order: Traders who are buying shares can use the sell stop order to limit losses on these “long positions” and to lock in their profits sooner rather than later.
- Stop-Limit Order: With this setup, you have a combination of a stop price and a limit price. Stop-limit orders will only be executed within a specified price range, but the trader is possibly risking non-execution.
Strategic Use Cases
- Protective Stop-Loss on Long Calls or Puts: Using stop orders is a part of good risk management as they put a cap on the possible losses you could incur with any given trade over time. These orders are good in general for traders to help them preserve capital and not take on unnecessary losses that could have been avoided through better management.
- Trailing Stops for Trend-Following Strategies: Traders can harness the power of the stop order to adjust as the price moves in their favor. This lets the trade run while still locking in profits.
Pros and Cons
Pros
- Automated Discipline: Using stop orders can develop discipline in trading and help traders to use risk management effectively. Setting up exit points based on price movements lets traders see their goals through, and not letting emotions play a part in the decision-making process, due to the fact that stop orders can automate the trade.
- Damage Control: Traders are putting a cap on their losses when using stop orders, so they carry the perk of minimizing losses that come from trades that don’t pan out as expected.
Cons
- Slippage Risk: This refers to the difference between the price at which an order is placed and the price level where the execution takes place. The risk of slippage can have a significant impact on a trader’s profitability in a good or bad way, which can lead to surprises.
- Market Gaps: Areas on a price chart where the price of the stock or asset moves sharply up or down with little to no trading in between. Market gaps can have negative effects on stop orders (as well as limit orders) and result in the dreaded slippage risk previously mentioned.
OCO (One-Cancels-the-Other) Orders—Dynamic Trade Management
OCO stands for “one cancels the other,” and this refers to a paired order setup where one trade fills and the other cancels automatically. The nature of these setups makes it easier for traders to manage the position from a distance without having to be constantly present on their trading app or visiting the website via a home computer. OCO is a lower-maintenance trade setup that appeals to those with a busier schedule than most.
What Is an OCO Order?
The OCO orders let traders place two exit orders at the same time, typically one being a limit order and the other being a stop order. When a target profit is hit with the limit order, the stop-loss order is cancelled automatically. The appeal of this setup is that traders don’t have to be glued to the screen with active monitoring. The OCO order enables simultaneous target profit and stop-loss placement, which lets them take a step back from the screen for a bit.
Benefits for Options Traders
- Set Exit Parameters: Traders can establish an upside and downside boundary for their trade well in advance.
- Low Maintenance By Comparison: Setting an OCO order allows traders to achieve their goals without having to constantly monitor their position. It’s a perfect solution for traders who might be working another job or just have a busy schedule.
- Good for Strategies With Defined Risk: OCO orders can be used to great effect with strategies like straddles, strangles, or vertical spreads.
Best Practices
- Best For Defined Risk Strategies: Traders will benefit the most from using OVO orders when they combine them with high-risk/high-reward plays like straddles or credit spreads, where the max loss is known ahead of time.
- Combine with Limit/Stop Orders: A good move is to use OCO orders in partnership with limits and stops for a higher level of strategic control.
Smart Tactics—Combining Order Types for Maximum Edge
How do you go about combining order types when trading options online? Check out the next section, where you can learn about using these different order types in conjunction with one another to gain a unique edge in the markets.
Example Setups
- Different Orders For Entry and Exit: Enter with limit orders to make the most of a price dip and then exit with the OCO order, where the target and the stop are both automated. This way, the trader doesn’t have to actively manage the position as much once it’s set up.
- Use Stop-Limit Instead of Market Order: As a way to avoid price shocks, traders can lean into using stop-limit orders with OCOs to avoid poor fills in fast-moving options trading environments.
Tactical Tips
- Adjust for Implied Volatility: It’s important to adjust your orders during special occasions like CPI week or in preparation for an earnings report released by the company whose stock you’re trading. During these times, traders can adjust for IV by widening their limits.
- Be Aware of Liquidity and Market Hours: Traders need to watch the expiration dates on the positions and use tighter stops as the expiry begins to draw near. In terms of liquidity, it is interesting to point out that traders will have an easier time with smaller contract fills using limit orders. The size of the orders can have an impact on the liquidity of the trade.
Platform Differences and Execution Tips
Before we get into which platforms are best to use in terms of enjoying a wide range of order types for automating your trading process (to an extent), it’s important to know that not all brokers handle advanced orders the same. Some might include limits and stops, but they might not delve into the more advanced order types like OCO. It’s critical to check ahead of time to find out if the platform you’re using is offering the three main order types.
Let’s take a look at some of the better-known brokers who include OCO orders as one of their features for online traders:
- Thinkorswim (TDA): OCO customization is available on this trading app
- Robinhood: Good choice for beginners, but doesn’t have OCO orders
- Interactive Brokers: Good choice for advanced traders (includes OCO orders)
- Tastytrade: Includes OCO orders
Sometimes you’ll be using a platform that doesn’t refer to these advanced orders as “OCO orders,” but will instead refer to them by another piece of terminology altogether, like “conditional orders” or “bracket orders.” Always confirm order routing and activation conditions.
Note: We included Robinhood simply for the fact that some beginners might be looking for a good trading app, but they might not have the skills or knowledge to take on OCO orders just yet.
Final Thoughts: Becoming a Smarter Options Trader
While there are many factors that go into trading options successfully, like market analysis and strategy, it is critical for traders to get execution correct to maximize their profits when the opportunities arise and to keep losses to a minimum with good risk management practices. Something that can make you more confident as a trader and help you develop a system that gets you used to making the best possible decisions in any given situation is to master the different order types to fully take control of your trades.
Remember that order types are not just tools—they’re strategic assets. We would encourage you to work stop orders, limit orders, or OCO orders into your next trading session and see what kind of difference it makes in terms of your overall performance. When possible, practice in a demo account before going live.
Suggested Next Read: The Psychology of Options Trading
Frequently Asked Questions
There is a lot of information to cover when it comes to order types that traders can use when they’re dealing with online options and other tradeable assets, so we’ve included a few of the common questions from our readers and customers to plug any information on the subject that we might have missed.
What Is the Safest Order Type for Options Trading?
In terms of safety, you’re going to have the most success with limit orders because they put a cap on how much a trader can lose with each position, which cuts down total losses significantly over the long term. Limit orders offer traders the most control over their investments and provide opportunities for the best entry and exit points.
Can You Use Stop-Loss Orders on Options?
Absolutely. Depending on which online broker you’re using, you can use stop-loss orders with stop and limit orders as well.
Do OCO Orders Work after Market Hours?
Most of the time, OCO orders work only during market hours, but you have to check with the options trading app you’re using for official clarification on the matter.
Which Order Type Fills Fastest in Options?
Generally, market orders are the ones that fill faster, being executed right away at the best price that’s available. The trade is executed as quickly as possible; however, it might not always be the best possible price. You’re sacrificing the best price for the best possible speed, which is a factor that matters greatly to some traders.
