Protect Yourself in Fast Markets

It can happen to anyone. If you're trading online, be aware that sometimes options trading platforms can develop delays, especially in fast markets when many investors want to trade at the same time, and prices change quickly.

Heavy traffic can occasionally slow down even the best options trading platform. When this happens, reports of price quotes and execution prices can lag behind actual prices. In "hot" markets, traders can suffer unexpected losses very quickly as a result of stale information.

If you're trading on an online options trading platform, and are used to instant access to your account, and near instantaneous executions of your trades, learn how you can protect yourself in fast-moving markets.

You can limit your losses in fast-moving markets if you (1) know what you are buying and the risks of your investment—i.e., know your risk; (2) know how trading changes during fast markets; and (3) take additional steps to guard against potential problems traders face in fast markets.

With a click of mouse at your brokerage firm's options trading platform, you can buy and sell stocks, or write or buy options—almost instantly. Although an online options trading platform saves you time and money, it does not take the homework out of making trading decisions.

You may be able to make a trade in the blink of an eye, but making wise trading decisions takes time. Before you make a hasty trade on an options trading platform, know why you are buying or selling, and the risk of your trade.

To avoid buying or selling on an options trading platform at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price.

A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a market order on an options trading platform, you can't control the price at which your order will be filled. 

Remember that your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled. But by using a limit order you also protect yourself from buying at too high a price.

Remember, too, that when online trading on an options trading platform technical problems can arise, slowing or preventing your orders from reaching the brokerage firm. This can be dangerous. This can even happen at the exchange level, where an entire exchange halts trading for a period of time. With that in mind, don’t spend too much time working orders in fast markets. If you have one leg executed and the market is halted, or broker goes down, you can be locked into a precarious position.

Most online trading firms offer alternatives to their options trading platform for placing trades. These alternatives may include touch-tone telephone trades, faxing your order, or doing it the low-tech way—talking to an actual person over the phone. If you are not already, familiarize yourself with these “plan-Bs”.

If you place an order on an online options trading platform during a crunch period, and you don't get immediate confirmation, don't automatically assume it didn't go through. You may mistakenly assume that your orders have not been executed and place another order. Then you might end up either having twice as big of a position as you wanted.

Additionally, if you cancel an order, make sure the cancellation worked before placing another trade on the online options trading platform. When you cancel an online trade, it is important to make sure that your original transaction was not executed. When in doubt, call the help desk at your broker. 

Trader Education