How to Place an Option Order - The right way to give your broker a telephone order for stock or index options

Correct options order entry is a critical factor in getting good fills when trading options. Here I start a discussion of how to properly place your options trading order with your broker over the telephone. We start with the simplest order, the straight buy or sell. Future columns will focus on spread orders, changing orders and checking on orders.

Options Trading Topic: How To Place an Option Order

Dear Options Trading FAQ:

The reps at the brokerage firm I use never seem to understand what I want to do. I get nervous when they try to rush me and things get muddled. Any suggestions?

Dread the Call

Dear Don't Dread:

Your anxiety is a common one. Option trading beginners are nervous enough about the position they are about to enter - put them in a fast-paced, unfamiliar environment and often there is confusion.

Do try to be careful. Misspoken words during option order entry can lead to serious money errors. Buys may be executed instead of Sells, Puts instead of Calls, etc. Remember, your broker will do EXACTLY what you say (whether you really meant to or not). Also, harried representatives have been known to be short on patience with confused order placers. Chalk it up to the poor upbringing of the reps, perhaps, but most customers have encountered a certain degree of rudeness early in their trading careers.

There is a set sequence of wording that Wall Street professionals use among themselves to avoid errors. Options orders are always "read" in this fashion. Clerks are trained from day 1 to listen for and repeat for verification the orders in the same way. If you, the public customer, adopt the same lingo, you'll be way ahead of the game. In addition to preventing errors in your account, you will win the respect of your options broker as a savvy, street-wise trader.

Here is the "floor-ready" sequence of an options order:

After identifying yourself and declaring an intent to place an option order, clearly say the following:

For a one-sided order (simple buy or sell of a stock option):

"Buy 10 Calls XYZ February 50's at 1 1/2 to open, for the day"
Always start with whether it is a buy or sell. When you do so, the clerk will reach for the appropriate ticket.

Next comes the number of contracts. Remember, to determine the money amount of the trade, you multiply this number of contracts by 100 and then by the price of the option. In the above example, 10 x 100 x 1 1/2 = $1,500. Don't ever mention the equivalent number of underlying shares. One client of mine used to always order 1000 contracts when he really meant to buy 10 options (equivalent to 1000 shares of stock).

Thirdly, you name the stock. Call it by name first and then state the symbol if you know it. Be aware of similar sounding letters. B, T, D, E etc., can all sound alike in a noisy brokerage office. Over-The-Counter stocks can have really strange option symbols.

The month of expiration comes next. Again, be careful. September and December can sound alike. Floor lingo uses colorful nicknames to differentiate. The "Labor Day" 50s are Sept options while the "Christmas" 50s are the December series. But don't get carried away with trying to use the slang. Don't ever use it to show off to a clerk. Simply use it for accuracy (e.g. "the December as in Christmas 50s").

Then comes the strike price. Read it plainly and clearly. 15 and 50 sound alike as does 50 and 60.

Name the limit price or whether it is a market order. Qualify it if it is something other than a limit or market order. For example, 1 1/2 Stop. Pet peeve of many clerks: Don't say "or better" when entering a plain limit order. That is assumed in the definition of a limit order. "Or better" is a designation reserved for a specific instance where one names a price higher than the current market bid-ask as the top price to be paid.

For instance, an OEX call is 1 1/2 to 1 5/8 while you are watching the President on CNN. He hints at a budget resolution and you jump on the phone. You want to buy the calls but not with a market order. Instead, you give the floor some room with an "1 7/8 or better order". Clerks use this tag as a courtesy to each other to let them know they realize the current market is actually below the limit price. This saves them a confirming phone call.

Next is the position of the trade, that is, to Open or to Close. This is the least understood facet. It has nothing to do with the opening bell or closing bell. It tells the firm if you are establishing a new position (opening) or offsetting an existing one (closing). Don't just think that by saying "Buy", your firm knows you are opening a new position. Remember, options can be shorted. One can buy to open or to close. Likewise, one can sell to open or to close.

If your order has any restrictions, place them here at the end. Examples are All or None, Fill or Kill, Immediate or Cancel, Minimum of 15 (or whatever you want). Remember, restricted order have no standing. Unrestricted orders have execution priority.

Finally, state if the options order is a day order or Good Till Canceled. If you don't say, the broker will assume it to be a day order only, but the client should mention it as a courtesy.

Very Important: Your clerk will read the order back to you in the same way for verification. LISTEN CAREFULLY. If you don't catch an error at this point, they can stick you with the trade.

Proper option order entry can mean the difference between a successful execution and a missed fill or a poor price. Doing it the right way can save you precious seconds. Further, it will mean a better relationship with your broker. The representative will act differently when he sees a customer who knows what he is doing. The measure of respect given to someone who knows how to give an order properly is considerable. After all, you've just proven that you "speak" his language.



Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Broker, Index Options, Stock Options, Options Order

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