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2013issue C0321

Option stop orders, wide spreads and forced market exits

An option stop-loss is elected when the stated price sits inside that option's own bid and ask, then handled as a market order. Historical platforms generally refused the electronic instruction because a thin book of resting limit orders could print the trigger without the underlying moving.

  • A stop-loss is elected once the stated price becomes part of the option bid and ask, then handled as a market order at the best available price.
  • Option platforms and futures venues generally refused electronic option stops because the option book, not the underlying, could print the trigger and produce large slippage.
  • Overnight crude oil option books often showed only resting retail limit orders, so the spread could stand multiple dollars of premium apart and elect a stop without an adverse futures move.
  • The same spread-balloon just before major economic or energy-inventory releases could force an exit the underlying never required.
Entries in this reading3 entries
Current trackMarket order32 readingsLimit order51 readingsStop-loss order297 readings

The stop is elected by the option quote

A stop-loss is an instruction meant to bound a loss or exit. On an option it is elected once the stated price sits inside that option's bid and ask.

After election it is no longer a priced exit. It is handled as a market order, filled at the best price then available and therefore exposed to whatever spread and depth are showing.

Why the electronic order was refused

Electronically entered option stops were generally not accepted on option platforms or futures venues. Only some open-outcry brokers might still take a phone instruction for pit handling.

Venues rejected option stop-loss orders because those instructions were prone to large slippage when the option book, not the underlying, printed the trigger.

When only limit orders remain

A limit order is a resting bid or offer that makes up the displayed book. In overnight hours, crude oil options often had no market makers, so the displayed bid and ask reflected only resting retail limit orders and could stand multiple dollars of premium apart.

That widening is a spread-balloon: a temporary stretch of the option bid and ask, often in thin sessions or just before scheduled releases, that can print a stop price without the trade having gone against the holder.

Exits the futures never asked for

A short June crude oil 120 call entered near 0.40 could have an 0.80 stop elected and filled near 1.60 if the book printed 0.10 bid and 1.60 ask, a stated loss of 1,200 without an adverse futures move.

The same spread balloon overnight or just before major economic or energy-inventory releases could elect a stop even though the underlying never traded through a level that justified exiting. A long option bought near 0.40 with a 0.20 stop intended to hold the loss near 200 could still be taken out at a much worse price if the bid and ask widened.

Editorial reading

This is TradersWeek editorial interpretation, not archive instruction. Treat the option stop as a routing and election problem, not a risk number.

The lesson is to inspect who is resting in the limit-order book, when that book can balloon without the underlying moving, and why a futures-style stop can force an exit the contract never required.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
18 of 26 in the Market order track
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All readings on this track · 26 readings
  1. 1995Canceled prints versus executable fills
  2. 1999How order routing changes market and limit fills
  3. 2000Direct access, intelligent order routing, and visible book depth
  4. 2001Retail routing and market versus limit fills
  5. 2001Stop triggers and opening-only short market orders
  6. 2002Market-order routing across linked venues
  7. 2002Market-order routing, internalization, and displayed size
  8. 2004Direct access order routing after the display rules
  9. 2004Listed-stock limit envelopes versus market-order routing
  10. 2005Closing option spreads with limit or market orders
  11. 2005Contingent routing as a pre-trade futures contract
  12. 2007Constructing executable futures orders with market, limit, and fill or kill
  13. 2008Bid-ask spreads, routing paths, and order choice
  14. 2008Retail market buys hit the ask
  15. 2008Limit versus market orders for a commodity option-spread
  16. 2011A pre-trade checklist before market or limit orders
  17. 2013Retail market orders and the displayed queue they never join
  18. 2013Option stop orders, wide spreads and forced market exits
  19. 2014Opening range breakout with weekday ratings, abstention and exits
  20. 2014Constructing forex orders from session liquidity
  21. 2015Order-type and routing scripts for faster execution
  22. 2015Market, limit, and routing choices inside the order life cycle
  23. 2015Handheld futures tickets as a second execution venue
  24. 2017Screen execution starts from the live bid and ask
  25. 2017Electronic stop-loss orders and protected price bands
  26. 2020Market-order slippage on split-adjusted stock prices
By fieldOrder types and routing87 readingsBy year2013169 readings
All 32 readings tagged Market order
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2014Constructing forex orders from session liquidity2017Electronic stop-loss orders and protected price bands1995Canceled prints versus executable fills1999How order routing changes market and limit fills2001Retail routing and market versus limit fills