Nickels add up. It’s true. If you’re an option trader you realize this by now. Each nickel you make (or save) on an option contract is $5 in your pocket. That’s $50 on a 10-lot; $500 on a 100-lot. Over the weeks and months and years, nickels are big money. Interested in learning how to save some nickels? Your method of trade entry may make a difference.
Bids and Offers
Typically, off-floor traders buy offers and sell bids. That is the nature of being a retail trader. But, what if you could get a better trade price? With some trades, I like to “middle the market”. That means try to buy below the offer (but above the bid) or sell above the bid (but below the offer). That means, if I get filled, I get filled at a better price–sometimes saving the coveted nickels. But it doesn’t always work. There’s a trick to it. Here is one tip on middling the market on trade entry.
Middling the Market
Market makers like to reduce risk. It’s their job. If they are making a trade, they’d prefer to make a less risky trade. In fact, they would be happy to put on a trade at a less favorable price if it has less risk. Spread trades have less risk. In many cases, market makers are willing to trade a spread between the market [i.e., buy (from you) above the bid or sell (to you) below the offer], in the process giving up precious nickels.
For example, imagine a call spread that you want to buy is .70 bid, offered at .85. Instead of taking the .85 offer, a trader may opt to bid .80 (above the bid but below the offer). In some cases, market makers will accept the bid shy of their offer. Sometimes not.
While there’s no way to know for sure if your bid will trade, one guideline is that it is closer to the offer price–you have to meet them more than half way. The same would go for you trying to sell. Your offer needs to be closer to the bid than the market maker’s offer.
But there is some risk in this technique. The market can change. If you bid .80 (a nickel away from the offer), and the market for the spread rises to being .90 offer, your chances of getting filled just got worse. Now, if you really want the spread, you have to pay up.
There’s a knack to entering orders; and there is certainly a bit more to it than what is discussed here. But it’s a start! Good luck trading. And if you haven’t visited MarketTaker.com in a while, check it out. I’ve made a few changes.
Dan
