Having trouble getting an order fill?
Four Common Scenarios
We’ve all been there. You put in an order and you’re not getting filled! You modify the price once, twice, thrice, and still no fill! Are you doing something wrong or has the market gone mad?! We’ve compiled some common scenarios that may shed some light on why you might have trouble opening or closing a trade:
Remember, when it comes to getting filled, liquidity is KING! One of the most important elements of options trading, liquidity trumps all. Most issues with order fills are the result of liquidity problems. There’s nothing like being in a winning trade you can’t get out of. Losing trades are even worse. Good liquidity means favorable closing prices. Poor liquidity could hurt you bad. In the world of trading we call this slippage.
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Wide Bid-Ask Spreads
The first sign of liquidity
Bid-ask spreads are usually the first indicator of liquidity. The wider the bid-ask spread, the more difficult it will be to find a favorable price. Chances are that there is also little to no volume. Simply inputting the mid-price will most likely result in a hanging order, unless there is some considerable price action. As a reference, the most liquid options have a spread as narrow as a penny. Generally speaking, if you are really itching for a fill, then you can consider changing your price closer to the natural, or nat price.
No Bid, aka No Buyers
0.00 bid = No Buyers, you can't sell something if there are no buyers
It’s hard to sell something when there are no buyers. If no one is bidding for what you are selling, you won’t get it off your hands. A simple way to see whether or not your option has buyers is to look at the bid price. You typically encounter this issue with far out-of-the-money options, especially those nearing expiration, that you want to close out. The 0.00 bid issue has the potential to affect almost every options strategy, especially spreads (i.e., verticals and iron condors). That means the long leg of any spread position may not fill as a whole since there are no buyers. However, if you are in a situation where you want to close out of a spread to eliminate any assignment risk, then you can at least buy back the short leg. After covering your short leg, you can enter an order to close the long leg at a $0.01 credit. That means the leg will close if there is a bid or the long leg will expire worthless.
Entering the order at Mid-Price
Mid-price is not a guaranteed price
Mid-price is a theoretical price used for price discovery. Just imagine you are selling a car for $20,000 and someone bids $15,000. Chances are you are going to say no, but will you sell it at the mid-price at $17,500? Maybe? Maybe not? The same logic applies to trading. Generally, wide bid-ask spreads are less likely to fill at the mid-price. If you are curious about the mid-price calculation, then here is the formula:
Mid Price = [(Ask-Bid) / 2] + Bid
Example of Wide Spreads, No Buyers, and Mid-Price
Entering the nat price for spreads & multi-leg orders (NBBO)
Entire order (all legs) must fill at one exchange
Do you have a spread or multi-leg options order entered at the nat price that is not filling? If so, you're not going crazy. When it comes to an order fill, spreads are unique, because the entire order (all the legs) must fill at ONE exchange. To understand this, you have to know how options quotes work. In the world of option quotes, the best quote must display. That means the highest bid price and the lowest ask price will list as the quote from all exchanges. This quote system is commonly known as the National Best Bid and Offer (NBBO).
One thing you'll notice when you enter an order is the natural price, and this is very important to understand when trading any multi-leg option strategy. The natural price, or nat price, is based upon the NBBO. The NBBO comes from taking the best bid price of one option and the best ask price on the other. Let's use a vertical spread as an example. If the best bid price for the short leg is quoting $0.10 in Chicago (CBOE) and the best ask price for the long leg is quoting $0.20 in Philadelphia (PHLX) the entire spread has to fill in one location. If the Chicago trader isn't willing to meet the best offer coming out of Philadelphia, or vice-versa, the nat price won't get filled. If an option or stock has decent volume and liquidity, then it is not uncommon to often or always see fills at the nat price, but you have to remember that it still isn't a guarantee.