Options - Ask / Bid difference

[Marek_$]

Hi

I recently sold (market order) an in the money option whose BID price was $19 and ASK price was $19.60. However, it appears that just as my trade got executed by the CBOE the BID price fell to $14.60 for a few seconds then returned to $19. I therefore only got $14.60 for it instead of $19. I've never seen such a sudden change before.

Does anyone know why this would happen and how can I avoid it in the future?

Thanks

Marek.

 

[greybox]

Execution

Marek,

I think there is a partial answer to your question in the following article in the Knowledge lab

http://www.trade2win.com/knowledge/articles/general_articles/those-darn-market-makers/

GB

 

[Directional]

dont use straight market orders. hit the bid with a limit order, that way you know if you dont get your fill at that price, you wont pay a significantly worse price.

 

[Marek_$]

dont use straight market orders. hit the bid with a limit order, that way you know if you dont get your fill at that price, you wont pay a significantly worse price.

Thanks Arbitrageur I'll do that in future. I used a market order because I wanted to sell no matter what. When I've used market orders in he past the order gets filled in the region of the expected price - I've never had a sudden $4 dip before. Why would this happen? The inderlying stock price didn't dip and it seems that it only dipped for a few seconds. My broker is investigating for me...

Marek.

 

[Marek_$]

Marek,

I think there is a partial answer to your question in the following article in the Knowledge lab

http://www.trade2win.com/knowledge/articles/general_articles/those-darn-market-makers/

GB

Thanks!

 

[theEdge]

... I've never had a sudden $4 dip before. Why would this happen?

The order book is made up of unmatched limit orders that have been placed by other participants. If one of them was to pull their order than the spread would widen and you'd get filled at the next best bid/ask. Yes, it feels **** when it happens, and I get screwed by the same thing that happened to you every few weeks. But that's life.

Happy Winter!

The Edge.

 

[jasonnoguchi]

What I personally do is this: (assuming you are trading the options of a liquid counter... all illiquid options will screw you up like you just experienced.)

1. Place a limit order at the prevailing bid price. ( if you are selling to open)

2. Go to the trade status screen and watch for 5 seconds.

3. If not executed, look up on the latest bid price and place a new limit order at the latest bid price.

4. Step 3 usually gets you filled if the stock is moving strong in your favor. If step 3 still don't get you filled, then the stock must be flying really fast. At this juncture, I would place half the trade one tick above the prevailing bid price and the other half at the price I placed in step 3 expecting a little whipsaw. (Yes, stocks that move this fast is highly subjectable to whipsaws)