Order types, legging and the pre-trade checklist

The last lesson is about execution: how to put the order in so that what fills is what you planned, and a checklist that pulls the whole course into one page you can use before every trade.

Order types for options

The conditional order deserves a note. A stop on the option itself triggers on the option's last trade, and thin options can go an hour without trading while the stock moves through your level. A conditional order watches the stock: "if XYZ trades at or below $47.90, send a limit order to sell my $50 call at the bid minus $0.05". That does what you meant.

Working a limit order

For a single option, start at the mid and, if not filled in a minute or two, move a cent or two toward the market. On an illiquid option you may not fill at all, which is information about whether you should be trading it.

For a spread, do the same with the net price. Platforms show the spread's own bid-ask, which is narrower than the sum of the legs' spreads; work from the mid of that quote.

Legging: why it goes wrong

Legging into a spread means placing the legs as separate orders, usually to try to get a better price on each than the spread market offers. What happens:

You want the 50/55 bull call spread at $1.70. The spread market is $1.65 bid / $1.75 ask. You decide to leg: buy the $50 call first at $2.38, then sell the $55 call at $0.72 for a net $1.66.

• Your $50 call order fills at $2.38.
• Before your $55 call order is placed, XYZ ticks down $0.30. The $55 call is now $0.62 bid.
• You can sell it at $0.62 for a net $1.76, worse than the $1.75 you could have paid for the spread in one order, or you can hold a naked long call you did not want and wait.

Legging exposes you to the stock's movement between fills, on a position you did not plan to hold. The gain from legging well is a few cents; the loss from legging badly is the full move in the first leg. On a liquid product, use the spread order; on an illiquid one, ask whether you should be in the trade at all.

If you must leg (some platforms do not support certain combinations), leg in the safer order: for a debit spread, buy the long leg first, so the interim position is limited-risk; for a credit spread, buy the long (protective) leg first for the same reason. Never sell the short leg first.

Key idea: Every option order is a limit order; every spread is a single multi-leg order at a net price. Exits tied to the stock use conditional orders, not stops on the option. Legging saves cents and risks the whole first leg.

Closing versus expiring

A resting GTC order at your profit target is the simplest discipline there is. For a credit spread sold at $0.45, a GTC buy-to-close at $0.22 fills when the spread decays; for a long option, a GTC sell at the target does the same. Add an alert on the stock at the loss level and the exit plan runs without you.

The pre-trade checklist

Copy this into your trade log and fill it in before every option order. If any line is blank, the trade is not ready.

The idea

1. Direction or level: what do I expect, and by when?
2. Size of the expected move, in percent: ___. Breakeven of the structure, in percent: ___. (Breakeven must be inside the move.)
3. Expected timing, in days: ___. Days to expiry: ___. (Expiry should be at least double.)
4. Scheduled events inside the expiry (earnings, ex-dividend, macro): ___.

The volatility

1. IV percentile: ___. If above 60 and I am buying, what is the vega cost of a return to median? If below 25 and I am selling, is the credit worth the risk?
2. IV versus 20-day realized: ___. Does the gap have a reason?

The structure

1. Structure chosen and why it beats the alternatives (single, debit spread, credit spread): ___.
2. Max loss per contract: ___. Max profit: ___. Breakeven(s): ___. Checked on the options profit calculator.
3. Greeks at entry (delta, gamma, theta, vega) and what each means in dollars per day or per $1 move: ___.

The size

1. Risk per trade from the plan: ___. Contracts: ___ (rounded down). Notional (strike × 100 × contracts): ___ and as percent of account: ___.
2. Dollar delta added: ___. Portfolio dollar delta after: ___ versus the cap.
3. Open positions after this one: ___ versus the cap.

The execution

1. Bid-ask as a percent of mid (single) or of net price (spread): ___. Under the 5% / 10% rule?
2. Open interest and today's volume on each leg: ___.
3. Order type: limit / spread limit at ___.

The exit

1. Profit target (option price or percent of premium): ___. GTC order placed?
2. Time stop (days remaining): ___.
3. Loss stop (option price or stock level) and how it is triggered (conditional order / alert): ___.
4. If short: what I will do if the short strike is tested, and the extrinsic value below which I will close to avoid assignment: ___.
5. Expiration plan: close by ___ (date), never hold a short strike within 1% of the stock into the close.

Twenty lines. The first few times it takes ten minutes. After a month it takes two, because most of the answers come from a plan you have already written.

Try it: Fill in the checklist for one trade you are considering or have recently made. Do not skip lines. Count the lines you could not answer honestly; each is a lesson in this course to revisit before the next trade.

Recap

• Use limit orders for every option, spread orders for every spread, and conditional orders tied to the stock for automated exits.
• Legging risks the stock moving between fills; if you must, put the long leg on first.
• Rest a GTC order at the profit target and an alert at the loss level so the exit runs without you.
• Fill in the pre-trade checklist before every order: idea, volatility, structure, size, execution, exit.
• The checklist is the course in twenty lines; combine it with the risk plan from the risk management course and the options profit calculator, and use all three every time.