Order Mechanics: Position Sizing, Slippage, and Using Limit Orders

How Options Orders Differ From Stock Orders

1 contract is not “1 share”

Stock orders are placed in shares. Options orders are placed in contracts, and each standard equity option contract typically controls 100 shares of the underlying. This is called the contract multiplier.

• If you buy 1 call for $2.50, the premium paid is usually $2.50 × 100 = $250 (plus commissions/fees).
• If you sell 1 put for $1.20, the premium received is usually $1.20 × 100 = $120 (minus commissions/fees).

Because of the multiplier, small-looking price differences (like $0.05) matter: $0.05 × 100 = $5 per contract.

Bid-ask spreads matter more in options

Stocks often have tight spreads (especially liquid names). Options can have wider spreads, particularly in less-liquid strikes/expirations. The bid is what you can sell at now; the ask is what you can buy at now. The spread is an immediate “friction” you must overcome to break even.

• Example quote: Bid $1.90 / Ask $2.10. The spread is $0.20, which is $20 per contract.
• If you buy at $2.10 and later sell at $1.90 (with no change in the option’s “fair value”), you lose about $0.20 × 100 = $20, plus fees.

Why limit orders are typically preferred

With options, the displayed mid-price (between bid and ask) is often a better estimate of a fair fill than either edge. A limit order lets you control your entry/exit price, which is crucial when spreads are wide or quotes move quickly.

• Limit orders reduce the chance of paying the ask when you could have been filled closer to the mid.
• They also reduce “surprise fills” during fast markets when option quotes can jump.

Slippage: What It Is and How It Shows Up

Slippage is the difference between the price you expected and the price you actually get filled at. In options, slippage is commonly caused by:

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• Wide spreads (you cross the spread when using market orders).
• Fast-moving underlying (option quotes update rapidly; your order may fill at a worse price).
• Low liquidity (few market participants at your strike/expiration).
• Order size (larger orders may “walk the book,” filling across multiple price levels).

Practical takeaway: treat the spread as a real cost. If the spread is $0.20, assume you may give up a meaningful portion of that on entry and again on exit unless you work limit orders.

Beginner-Relevant Order Types (and Common Cautions)

Limit orders (recommended default)

A buy limit sets the maximum price you will pay. A sell limit sets the minimum price you will accept.

• Buy limit example: “Buy to Open 1 contract at $2.00 limit.” You will not pay more than $2.00.
• Sell limit example: “Sell to Close 1 contract at $2.40 limit.” You will not accept less than $2.40.

Many traders start at the mid and adjust in small increments (often $0.01–$0.05 depending on the option’s tick size and liquidity) until filled or until they decide to pass.

Market orders (use with caution)

A market order prioritizes execution over price. In options, that can mean an unexpectedly poor fill, especially when spreads are wide or the market is moving.

• If the quote is Bid $1.90 / Ask $2.10, a market buy may fill near $2.10 or worse.
• If liquidity is thin, the next available ask might be much higher than expected.

If you ever consider a market order, first check: spread width, volume/open interest, and whether the underlying is moving sharply.

Stop orders: why they’re tricky for options

Stops are popular in stocks, but can be problematic in options because option prices can jump around due to spread changes and quote updates. A stop can trigger on a temporary print and then fill at a poor price.

• Stop-market: triggers a market order once the stop price is hit. This can create severe slippage.
• Stop-limit: triggers a limit order once the stop price is hit. This controls price, but introduces the risk of not getting filled if the option gaps past your limit.

If you use stops at all, consider stop-limits with realistic limits and understand that “protection” may fail during fast moves.

Opening vs. closing orders (labeling matters)

Options tickets typically require you to specify whether you are opening or closing and whether you are buying or selling:

• Buy to Open (BTO): start a long option position.
• Sell to Close (STC): exit a long option position.
• Sell to Open (STO): start a short option position.
• Buy to Close (BTC): exit a short option position.

Using the correct action helps avoid accidental short positions or unintended exposure.

Position Sizing: Controlling Risk Before You Click “Submit”

Define your maximum acceptable loss per trade

Before placing an options order, decide the maximum you are willing to lose if the trade goes against you. For beginners, a simple rule is to cap the loss per trade to a small percentage of your account (for example, 1%–2%), but the exact number is your choice.

Two common ways to define max loss:

• Premium-at-risk (long options): if you buy an option, the premium paid (plus fees) is the maximum loss if you hold to expiration and it finishes worthless.
• Planned exit loss: you may choose to exit earlier (e.g., at a 50% loss). In that case, size the position so that a 50% premium drop equals your max acceptable loss.

Example: Account size $10,000. Max loss per trade $150. If you plan to exit at a 50% loss, then the premium you can buy is about $300 total (because 50% of $300 = $150). That means you could buy 1 contract at $3.00 ($300) or 2 contracts at $1.50 ($300), ignoring fees for the moment.

Avoid over-concentration in one underlying

Options can create large exposure to a single stock or ETF. Even if each trade is “small,” multiple positions tied to the same underlying (or the same sector) can behave like one big bet.

• Limit the number of positions tied to one ticker.
• Watch correlation: several tech stocks can move together; several index-related ETFs can move together.
• Consider staggering expirations so not all risk clusters in the same week.

Account for assignment and buying power (especially with short options)

Short options can create obligations that affect buying power and risk:

• Short puts can lead to assignment: you may be required to buy 100 shares at the strike price. Ensure you have the cash (cash-secured) or understand margin requirements.
• Short calls can lead to assignment: you may be required to deliver 100 shares. If you don’t own shares (naked call), risk can be very large and may be restricted for beginners.

Even before assignment, brokers reserve buying power based on the position’s risk. If you size too large, you can end up unable to adjust, hedge, or exit comfortably.

Step-by-Step Example: Opening a Long Option With a Limit Order

Scenario: You want to buy 1 call contract. You are focusing on execution quality and cost tracking.

Step 1: Read the option quote and spread

Assume the option is quoted: Bid $2.40 / Ask $2.60. Mid is $2.50. Spread is $0.20 = $20 per contract.

Step 2: Decide position size from max loss

You decide your max acceptable loss is $200 on this trade. If you buy 1 contract around $2.50, premium is about $250, which exceeds $200 if held to zero. Options:

• Buy a cheaper contract/strike/expiration (not always available at the same thesis).
• Reduce size (already at 1 contract; you can’t go smaller than 1).
• Use a planned exit (e.g., exit if premium drops 20%). If you truly will exit at -20%, then expected max loss is about $50 (20% of $250), but you must be disciplined and accept that fast moves can exceed that.

For this example, you accept the premium-at-risk approach and set max loss to $250 + fees, or you choose a different option. We’ll proceed with 1 contract for illustration.

Step 3: Place a Buy to Open limit order

You place: Buy to Open 1 @ $2.50 Limit. If it doesn’t fill, you can adjust:

• Start at $2.50 (mid).
• If no fill after a reasonable time, try $2.52 or $2.55.
• Avoid immediately jumping to $2.60 unless you truly need instant execution.

Step 4: Confirm estimated total cost including fees

Suppose commission is $0.65 per contract and regulatory/clearing fees total $0.10 (example numbers; vary by broker). Your estimated cost:

• Premium: $2.50 × 100 = $250.00
• Commission/fees: $0.75
• Total debit (cost basis): $250.75

Step 5: Track cost basis and break-even for your trade management

For tracking, record:

• Fill price: $2.50
• Contracts: 1
• Total cost basis: $250.75

When you later sell to close, your net profit/loss will be based on the exit credit minus this total debit (including fees on both sides).

Step-by-Step Example: Closing the Long Option and Seeing Spread Impact

Assume later the option quote is Bid $3.10 / Ask $3.30 (mid $3.20). You want to sell.

Step 1: Place a Sell to Close limit order

You place: Sell to Close 1 @ $3.20 Limit. If not filled, you may adjust down slightly (e.g., $3.18, $3.15) depending on urgency.

Step 2: Compute net proceeds and P&L including fees

Assume you get filled at $3.18. Exit proceeds before fees: $3.18 × 100 = $318.00. Subtract exit commission/fees (say $0.75 again): net credit $317.25.

Notice how execution and fees matter:

• If you had used a market sell and got filled near the bid ($3.10), your proceeds would be ~$310.00 before fees, reducing P&L by roughly $8 per contract versus a $3.18 fill.
• On wider spreads, the difference can be much larger.

Step-by-Step Example: Short Option Order Mechanics (Credit, Buying Power, and Closing)

This example focuses on mechanics and accounting, not on strategy selection.

Opening: Sell to Open a put (credit)

Assume you sell 1 put and the quote is Bid $1.45 / Ask $1.60 (mid $1.525). You place: Sell to Open 1 @ $1.53 Limit and fill at $1.52.

• Premium received: $1.52 × 100 = $152.00
• Minus commissions/fees (example $0.75): net credit $151.25

Your platform will also show a buying power reduction or margin requirement. If the put is cash-secured, you may need enough cash to buy 100 shares at the strike price (minus the credit received, depending on broker treatment).

Closing: Buy to Close (debit) and spread awareness

Later, the quote is Bid $0.70 / Ask $0.85 (mid $0.775). You place: Buy to Close 1 @ $0.78 Limit and fill at $0.80.

• Cost to close: $0.80 × 100 = $80.00
• Plus commissions/fees (example $0.75): total debit $80.75

Key mechanics:

• For short options, you profit when you can buy back cheaper than you sold (after fees).
• Wide spreads can make closing more expensive than expected; plan exits with limit orders.
• Assignment can occur, so position sizing must consider the obligation (100 shares per contract) and available buying power.

Practical Checklist Before Submitting an Options Order

• Multiplier check: price × 100 × contracts = true dollars at risk/received.
• Spread check: if spread is large relative to premium, consider skipping or reducing urgency.
• Order type: default to limit; avoid market orders unless the option is very liquid and the spread is tight.
• Size check: confirm max acceptable loss and ensure the position fits it.
• Concentration check: avoid stacking multiple trades on the same underlying/sector.
• Assignment/buying power check: especially for short options, confirm you can handle assignment and still manage the account.
• Cost basis tracking: record entry/exit fills and include commissions/fees to understand true results.