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2007issue C111

Overnight option limit fills, stops and trailing exits

A call limit set from the prior session and left working outside regular US hours can miss the open if the underlying gaps higher. Once a fill exists, a fixed stop and a trailing stop can bound residual premium loss and protect unrealized gains as the contract's market value rises.

  • A limit order to buy a call, set from the prior session and left working outside regular US hours, can remain unfilled if the underlying opens higher and the option's market price rises with it.
  • A limit posted between the bid and the ask executes only if another party will trade at that price. Improving the quote by about one-third of a 15-cent spread, or 5 cents, still does not assure a fill.
  • A market order can obtain an opening fill when a limit would miss, but it accepts the opening price, which can be unfavorable if the stock is strong early and weaker later.
  • On a long 35 call bought at 1.50, a stop at 0.75 bounds a 50 percent premium loss. A trailing stop held 0.75 below later prints at 1.60 or 3.00 sits at 0.85 or 2.25.
Entries in this reading3 entries
Current trackLimit order51 readingsTrailing stop122 readingsStop-loss order297 readings

Two sequential execution decisions

Editorial note: this archive article treats an options trade as two execution decisions in sequence. The first is whether an overnight mid-spread limit is allowed to miss a gap open. The second is whether, once a fill exists, a fixed stop and a trailing stop keep the same contract's loss and give-back bounded as the premium changes.

A limit order is an instruction to buy or sell only at a stated price or better. It can improve the fill relative to the quoted market, but it can also remain unexecuted if the market never trades at that price.

Overnight limits and the opening gap

A limit order to buy a call, set from the prior session's quotes and left working outside regular US hours, can remain unfilled if the underlying opens higher and the option's market price rises with it. That session-open move away from the prior close is an opening gap. It can reprice the option and leave a limit set from yesterday's quotes unfilled.

A limit posted between the current bid and ask can fail to execute unless another party is willing to trade at that price. The bid-ask-spread is the gap between the posted bid and offer that a limit price must negotiate if another party is to take the other side.

One spread-sharing heuristic is to improve the quote by about one-third of the posted gap. For a 15-cent spread, that improvement is 5 cents, while the remainder is left for the other side. Even then a fill is not assured.

A market order is an instruction to transact at the prevailing opening or market price. It can obtain an opening fill when a limit would miss, but the fill occurs at the opening price and accepts whatever that opening print is. That print can be unfavorable if the stock is strong early and weaker later.

A fixed stop and a trailing stop after the fill

A stop-loss is a pre-committed exit that becomes active if price reaches a chosen loss-bounding level, so the exposure decision is set before or during the position rather than after a large adverse move. A sell-stop is an instruction to exit if price breaks below a stated level. A stock bought at 52 with a stop at 50 is used to illustrate bounding a loss at about 4 percent.

On a long 35 call purchased at 1.50, an initial stop at 0.75 is used to bound a 50 percent premium loss before any trailing adjustment.

A trailing stop is a stop that is restated as the contract's market value moves in the position's favor, so the exit level follows the option premium instead of staying fixed at the original stop. If that same call then trades at 1.60 or 3.00, a trailing stop held 0.75 below the option's market value would sit at 0.85 or 2.25. The exit both limits residual loss and protects unrealized gains as the premium rises.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
10 of 20 in the Limit order track
201043-43 pp.Next on Limit orderSeasonal commodity windows and stop-limit fill riskTreat seasonal commodity leans as recurring inclinations, not guaranteed outcomes. A counterseasonal move can reverse the thesis and produce large losses.
All readings on this track · 20 readings
  1. 1994Cash-first stops beyond crowded landmarks
  2. 1996Index spread pairs with seasonal filters and limit orders
  3. 2003Precommit the stop and limit after a rule-based entry
  4. 2005Limit orders, routing paths, and commission tradeoffs
  5. 2005Bracket orders that precommit stop and target exits
  6. 2005Precommit a stop-loss at entry with pivot triggers
  7. 2006Mechanical systems need fill-aware failure modes
  8. 2006Ranking near-term support for ETF limit entries
  9. 2007Precommit futures stops and limits with contingent orders
  10. 2007Overnight option limit fills, stops and trailing exits
  11. 2010Seasonal commodity windows and stop-limit fill risk
  12. 2011Routing fees, do-not-ship flags, and maker-taker limit orders
  13. 2011A three-bar inside-bar commodity setup still needs portfolio context
  14. 2012Limit orders when a tick saved costs the fill
  15. 2013Futures platform order entry and per-trade fees
  16. 2013Iceberg hidden size and option-spread packages
  17. 2014Marketable limits, directed venues, and spread filters
  18. 2015Filtering commodity option liquidity by spread, not open interest
  19. 2015Paired range-bar averages and next-bar limit exits
  20. 2019Uneven-wing modidor as one limit package
By fieldOrder types and routing87 readingsBy year2007144 readings
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