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Order entry is an important part of the trading process. Each order represents the strategist’s instructions to the broker regarding the price they are willing to pay or receive for a stock, option, or other investment. Once the order is received, the broker takes it to the marketplace and executes the trade on behalf of the strategist or customer. However, not all orders are the same. There are several different types and knowing which one to use will often depend on the trading situation. 

Market Order: A market order is the most basic order. As the broker receives the order, it is sent to the appropriate market and the trade is executed at the best possible price. Market forces or the current bid price (for a sell order) or asking price (for a buy order) will determine the price of execution. However, with a market order, there are no guarantees. The trade can take place at a price that is different then the bid or ask when the order was placed. Providing sufficient time remains in the trading day, a market order does, however, have guaranteed execution.

Market orders are often used when the strategist wants to get in the position quickly and is not too concerned about paying an extra nickel or dime for getting in a trade. In fast markets, such as some of the electronic futures, market orders are often used because fast execution is often more important than best possible price. So, when traders want to get in and out of a position fast, a market order is often the best choice. In highly liquid markets, where the spreads are small, market orders will often do the job as well. For example, when trading the Nasdaq 100 QQQ (QQQQ), where trading is active and the difference between the bids and offers is often a dime or a nickel, market orders also make sense.

Importantly, the execution by the broker is important when the strategist uses market orders. If trades are consistently being executed (or “filled”) at prices that seem unreasonable given the current market conditions and bids and offers, the firm is guilty of providing poor execution on its market orders. This shouldn’t happen at most of the reputable online brokers today, but if it does, it might be time to switch brokerage firms. 

Limit Order: A limit order is entered when the trader wants to specify a maximum price when buying securities or a minimum price when selling securities. The strategist will pay no higher or sell no lower than a specific price. As a result, price is guaranteed, but getting filled is not. Brokers will generally try to get the limit price or better.

Limit orders are used when the strategist is willing to wait for execution, but wants to get the best price possible. It is very useful when entering a position, particularly in accounts where adding funds is restricted (i.e. retirement account). Providing there is no urgency to exit a position, limit orders are used for selling a position. In the options market, a limit order that is between the bid and offer price will be displayed for other traders to see. Doing so lets other traders know that a buyer is willing to purchase or a seller is willing to sell the contract at a specific price. For instance, if I place a buy order between the bid and offer of an options contract, it will be displayed as the best bid in the market place. This is to my advantage because it shows other traders that I am currently willing to buy that contract at that price. However, if the order is placed as an All or None order, it will not appear in the market.

All or None: An all or none order specifies that the strategist wants to have the entire trade executed and does not want a partial fill. In some situations, it can be frustrating to place an order to buy ten contracts, only to have an order filled for one or two contracts. It costs more in commissions and might take a lot more time to get the entire order filled. For that reason, some traders prefer to use an all or none order when placing orders that involve more than one contract. 

Day Order: By default, market and limit orders are day orders. Meaning, the orders are good only for that day. Once the market is closed, the order is null and void if it has not been executed. If the strategist wants to keep the order active for more than just that trading day, they must select a GTC order. 

Good Till Cancelled [GTC]: Since limit orders may be far away from the existing bid-ask for a security, the trader has the ability to place the order as a GTC order. The order will generally stand in the market for about 60 calendar days. The number of days depends on the brokerage firm, however. If this is important to the strategist, they should contact their firm and find out how many days a GTC order will sit.

Stop Order: Stop orders are often used as risk management tools and should not be overlooked. It is an order that turns into a market order when a specific price is reached. If a sell stop order is triggered, it turns into a market order to sell at the current market price. For example, I hold shares of XYZ, but if it falls below $50.00, I want to bail out of the position. So, I place a stop order at $50.00 and, once it hits that level, the position will be sold at that current market price.

Stop Limit Order: A stop limit order will also instruct the broker to take action once a specific price level is reached. However, rather than turning into a market order, the stop limit will turn into a limit order. So, once the stop is triggered, the broker will attempt to buy or sell the security at a specific price. There is no guarantee that the trade will be executed at that price. It will depend on which way the market is moving. So, if the strategist wants guaranteed execution once the stop price is hit, a normal stop order will be used rather than a stop limit.

Trailing Stop: A type of stop order that is adjusted along with the movement in the price of the security. The trailing stop is often used once the strategist has entered a successful trade and wants to protect profits. For example, if a trader buys XYZ shares at $50.00 and the position has a $10.00 profit, the strategist might place a trailing sell stop order $5.00 below the current market price in order to protect half of the profit at that time. Then, if XYZ moves up from $60.00 to $61.00, the trailing stop moves from $55.00 to $56.00.

Market on Close (MOC): Sometimes called an “at the close order,” it instructs the broker to execute the trade as near to the end of the exchange day as possible. It is a market order.  

Limit on Close: Just as with the market on close, the order specifies that the trade should take place as close to the end of the trading session as possible. However, rather than excepting a market price, the trade is placed as a limit order or better. As a result, execution is not assured.

One Cancels Other (OCO): An OCO order instructs the broker to cancel one order if another order is executed. For example, a strategist might instruct the broker to buy shares of the QQQQ and the Street Tracks Gold Fund (GLD) at limit prices, but specify that it is a one cancels the other order. So, if one order is filled, the other one ceases to exist. This is sometimes done when the investor has limited funds. In our example, the trader wants to buy either shares of the gold fund or the QQQQ, but not both.

Contingent Orders: Contingent orders represent orders that are activated based on preset conditions. This is sometimes done in the options market when an options strategy is placed based on the price move in the underlying asset. For example, a strategist might buy XZY January 60 puts contingent on XYZ shares falling below $65.00 a share. 

Opening and Closing: In the options market, orders are either opening or closing transactions. If a strategist is initiating a new position, the order is entered as an opening transaction. For example, the strategist might enter an order to buy 10 XYZ January 50 calls to open. On the other hand, when the trade is canceled out, the broker is instructed to sell 10 XYZ January 50 calls to close. Sometimes the sale of an option can be an opening trade. For example, a covered call writer will buy shares and sell calls to open.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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