7 Steps to Success Trading Options Online - Traders' Library

tracts or less, although this limit is expanded to 50 for some indexoptions. The order must be a “market” order or a limit order at the“bid” (for sales) or the “offer” (for purchases). The option itselfmust be in one of the three most actively traded expiration series,and the option premium must be $10 or under.If an order meets those criteria, there are only two circumstancesunder which the guaranteed execution won’t be carried out on agiven exchange. The first is if a better price is available on anotherexchange where the option also trades. (U.S. options exchangesall belong to an Electronic Communications Network, or ECN, thatenables the latest sales prices, bids and offers for a given option tobe displayed on all floor terminals where that option is traded,regardless of the exchange at which they are located.) In that case,the order will be routed to the “public order book,” where it willgenerally be executed by a member of the trading crowd.The second circumstance when an order won’t be automaticallyexecuted is when an identical order is already on the public orderbook and has not yet been filled. In that case, the newer order isrerouted to another execution system, where it falls in behind theolder order that was already on the books.The advent of guaranteed automatic execution has obviously beenof great benefit to smaller retail options traders, putting them onexactly the same footing as larger institutional traders. It’s a far cryThe “Unbundling” RuleIf you don’t believe the automatic-execution systems give you an edge over professionaloptions traders, you should be aware that Securities and Exchange Commission(SEC) rules specifically prohibit registered broker/dealers and their associatesfrom using the systems to execute institutional trades. The exchanges also have rulesbarring broker/dealers from splitting— or “unbundling” — large orders into quantitiesof 20 contracts or less in order to qualify for the system, and the computers monitoraccount designations to assure compliance. In fairness, retail customers are also discouragedfrom “unbundling” their larger orders. Some brokers even build brief orderentrydelays into their software so they can monitor for essentially identical smallorders coming back-to-back out of the same account. All this because the automaticexecution system is such an efficient and cost-effective way to trade options.26 Trade Secrets