I put in an order before the market opened to buy WFC Jan 31 call at market price. The previous closing price was $5. The order was filled at 9.30:23 am at $20! The next price was $5. How is this possible? Its clearly very risky making buy or sell orders at market price...
I'm not particularly familar with calls but I would say: 1) Don't use market orders in such circumstances. I would only use a market order if I can see the bid/ask and know I can live with what I'm seeing. 2) You could have asked your broker to try and have the trade busted based on the price being erroneous (i.e. no where near fair market value) but this would have had to have been done almost immediately.
=========== abz; A generous limit order ,limits damage. The trader that got it for $5, most likely used a limit order; requires more plans, prefer limits, but some times plans fail. But both IB,OXPS can give price improvement on limit orders
This is strange. How do you know what was the next price? Even with the market order option's price should be reasonably near it's fair price. So your case depends on the stock price at the time.
I don't know the exact next price, but when I checked a few moments after the order was filled at 20 then price was back to 5. The previous days close for WFC was 25.72 and the opening price was 25.95 so price movement of the underlying cannot account for the jump in the price of the call. The IV would have had to jump from 75 to 103. Never use market orders!
I don't think that would necessarily protect you from a fill like this. There's nothing to prevent them filling you wherever they want. Sure, there's probably some rule somewhere on the books about filling you at a 'fair' distance from the B/A at the time the order was entered, but just go ahead and try to win your case. Market orders are ok if you want to get out of your ES position in a hurry, but in an options trade? Hopefully some of the acknowledged options guys will chime in, but I don't think so.
In my opinion this is nothing to do with the market orders. Even marker orders have to be fair. You trade with market makers. Their offered prices should be reasonably near fair value. Somebody just might have made (20-5)/5 = 300% profit ( given that $5 was options fair value) in few seconds by trading against you. If it's not a swindling I don't know what it is. If I were you I would be contacting your broker and asking for explanation ( Bloomberg data ). Read this http://www.investopedia.com/terms/n/nbbo.asp
Your order was mostly likely sent to the exchange before the markets were made available on that strike. I suspect the trade has been busted and if not, you should have contacted the trade desk immediately as a bust request could have been made to the exchange. Many exchanges have strict time requirements between the time of an execution and when a bust can take place.
I have received this explanation from IB: "When you use a market order prior to the open; you will get the opening ask price for the option. The opening bid ask for the option was no bid at .20. That is why you paid .20. ( it was the opening ask ). If you wanted to limit what you pay for an option; you need to use limit orders. "