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Today, I’m excited to take you one step further on your options journey as we prepare to exit our Qualcomm (Nasdaq: QCOM) call options in the coming weeks.
This was a free trade I told you about last month that you could’ve used to walk through our strategy. We showed you how to enter an options trade, lessons about exiting a trade and more.
But before it’s time to exit this trade, I want you to be prepared. That’s why we have one more point to cover today. This will help you lock in the best price when it’s time to exit.
I’m talking about “market orders” versus “limit orders.”
I get questions about this topic all the time. And today, I’m going to show you the perfect example of why we prefer one over the other.
It has to do with the bid and ask prices…
These Gains Can Add Up
Qualcomm’s price dipped today on news that Apple would be replacing Qualcomm components in its future devices. It’s a one-off drop though — many analysts had seen this coming for a while now.
So, I don’t expect the price to stay down for long.
We’ll use prices from where they closed yesterday to highlight the impact market orders and limit orders can have on your overall return.
Just as a reminder, I do not recommend exiting the call option today. We are simply taking the time now to understand how market orders and limit orders work when it’s time to exit the trade.
When you pull up your option, you’ll notice a bid and ask price. This will dictate the price you get.
The bid is the price that option buyers are saying they’ll buy the option at. The ask is the price that the people holding the option will accept.
It’s just like any transaction — when you’re buying something, you want to get the cheapest price. And when you’re selling something, you want to sell it for more. So, the bid price will always be below the ask price.
That matters because when you place a market order, you’re saying you’ll accept the bid price. You’ll get filled right away, but it will always be the bid price or lower.
At yesterday’s close, the bid price was $13.45 and the ask was $14.45. Even worse, with a market order, the price could change from the second you hit the “confirm” button to the point your order is filled. The price you got could have been even less, like $13.25 or lower.
At $13.25, we would be showing a return of 49% on our trade.
But if you follow our advice and use a limit order, you’ll do much better…
Our advice would have been to simply look at the bid and the ask — $13.45 and $14.45, in this case — and take the midpoint for your limit price — $13.95. This may not get filled right away, but it is $0.50 higher than what a market order would get you at the current bid price.
That would show an overall return of around 58%. And a 9% difference just by using a limit order is great for one trade, but you can imagine how quick this adds up on multiple trades.
This is one of the main reasons we recommend limit orders. You can use a limit price to work the market for a better return.
It doesn’t take much effort.
And it adds up to free money many investors will not even attempt to collect.
Remember Limit Orders When Exiting
So, when it comes time to exit our Qualcomm call options, you know the preferred method: limit orders.
But you’ll need to determine the best price for your limit order by looking at the bid and the ask.
When it’s time for us to exit, I’ll let you know the minimum price we want to exit at.
If the stock falls below my limit price, it means we want to hold off on exiting the trade. Otherwise, we’ll just set our limit orders and let the market do the work for us.
Our time frame for the trade is two months — that’s the longest we would want to hold it.
That means we’ll be looking to exit our position before the first week of the new year. I’ll keep an eye on our option and let you know when it’s time to take action through your Weekly Options Corner dispatches.
Going through this free trade was the best way to see how options prices swing in real time, and how you can use limit orders to your advantage.
If you’re ready to go further with options, you’re in luck. We put together a special offer just for Weekly Options Corner readers. Check it out by clicking here.
Next week, I’ll have some more exciting news for you as I share the No. 1 secret about using options for income.
Chad Shoop, CMT
Editor, Quick Hit Profits