I know that I should take into consideration commission and liquidity costs (bid-ask spreads) when considering placing a trade, however I am not sure how much should I worry about those? For commission I can pick broker with lower fees and try to negotiate better price, and for liquidity I can limit myself to trade only highly liquid options. Is there anything else here that I should worry about or do? How do you estimate these costs and account for them when trading?
Considering these is essential to creating an effective risk management model. If short term trading, only trade liquid markets where there is virtually no slippage---such as ES.
Thanks! Is there anything else I can do except choosing liquid market / instrument, specifically asking regarding options?
I don't recommend trading options, but if you do , it must be limit orders only and don't risk more than 2% of TLNW on any one trade/idea.
The "costs to transact" include the spread, slippage, and commission... with the latter often being the smallest component. The pit-traded "Big Contract" in the SP500 (5X the size of the ES) has almost* disappeared. Commission costs of "5 ES" are greater than "1 Big Contract", but slippage is less in the ES. * I used to trade the Big Contract, but it has been a few years since I bothered to check on it. It might already be extinct. Last I looked, the $$ volume of the Big was only about 10% of the $$ volume in the ES. If not already, time to put the Big Contract out to pasture.
What virtually no slippage in ES? We trading at new exchange? Crap, I must be losing it as I approach sixty years old. If you day trade and average six trades a day and on $5k account, consider it to be min of 100% needs to be made to pay for commissions and fees. If you do long term trades, much less percentage needed with less trades. Bite your tongue on getting rid of big contract of S&P500, I use it for long term and use options as well. Unless you use limits all the time to enter, you will always lose min of one tick due to the spread, using limit is nice but don't expect to get filled all the time. And using stops for protection, if you put them where others do, you can expect one tick of slippage, depends on your connection speed as stops remains on your PC on most platforms.
Spreads and slippage are a major issue with options. Assuming you are approved for options trading with your broker, you need to pull up quotes for various underlying instruments to see the bid ask spreads. And if you are new to trading, options are not the place for you to be putting your attention.
I didn't say "no slippage in the ES"... just less than the Big Contract. So... if you're using the Big, I guess it hasn't been put out to pasture yet.
I wouldn't worry about it at all, commissions and the bid/ask are part of trading. Focus on profitable trades.
"BUY1Sell1" said virtually, so I wasn't referring bout you with slippage. I wouldn't day trade the Big S&P500 now, though I did in 80-90s when it was $500 a point, got the most bang for the buck on comm. The only bad thing of Big S&P, it trades during the day, so you have to protect stops with ES at night.