In this post, we will describe in brief what is a conditional order and how it can be used with options. Also, we will describe step by step how to place a conditional order for option trades.
Options are. a derivative product of the underlying stock and its prices are dependent on the price of the underlying stock (at least the intrinsic value of the option). As a techieinvestor, you would have identified the target price of the underlying stock for the option considered before buying options. If we know the target price that could be reached within the expiration date of the option considered, it will be nice to sell our options when the price reaches the target. How can one do that?
We can buy or sell our options based on the price of the underlying stock using conditional market orders with GTC time frame selected for the order. In fact, conditional market orders can be used with any underlying stock price ( For example, we can chose market ETFs like SPY). Conditional market orders can be used to either purchase or sell an option ( even spreads) based on the underlying stock price How to place this conditional oder?
Lets say, we want to buy APPL October 30 117 calls when the stock price crosses 117 and below. First open the option chain for AAPL Oct 30 as shown in the screen shot below
Click on the ask price of 2.92 on the call side of 117 to get the order ticket. In the order ticket window, select price type as market , automation as quote trigger, duration as GTC , special handling as NONE( other option is AON - all or none). When special handling is selected as NONE, some contracts could be sold at the specified target price and some may not. Select create Trigger after verifying the values provided as shown below
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When Create Trigger is invoked, a new screen will show up where we can enter the target price for the stock. As mentioned before, we can choose any stock here.
As shown here , by default, this order is executed when the quote condition is satisfied. The other option is to cancel the market order when the condition is satisfied. Preview the conditions selected and place the order.
Here, we have shown how to buy to open an option based on conditional orders. Similarly, we can sell to close an option based on conditional order
FYI, screenshots provided in this post. are from power ETrade.