Guys, Im a neophite to options. please define "slippage". ive read a few books and traded a few puts and calls (spleculative) and a collar on fcx and mos. Not sure where to go from here.
umm, thanks for the definition but... "slippage is the difference between estimated transaction costs and the amount actually paid" My broker charges a specified amount. Clear as mud. thanks Limit orders lock purchase price.
please read above.. i said LIMIT order.. would anyone please define how this relates to a lay person like me..
AFAIK slippage consists of commission plus the difference between bid and ask. Let's say you buy a call at $1.50. If you wanted to turn around and sell it immediately you might get $1.40, plus you would pay commission both ways.
Commissions are not part of the slippage. A limit order doesn't have slippage cause you are either filled at your price or not filled at all. Here's another example. Let's say you have a stop order to sell an option at 1.00 (a stop order becomes a market order when hit, obviously using market orders in options is not the best practice). So, your stop gets hit and you order is executed at 0.90 due to the bid-ask spread and/or fast market. So, in this case, 0.10 is the slippage, which is the difference between the expected price (1.00) and the actual execution price (0.90). In other words, slippage is the bid-ask spread, the market's adverse move and etc. Basically, it is the price you have to pay for immediacy. That is, the more urgently you want to get your order filled the greater the slippage. A market order guarantees you a fill, but not the price, hence it can have significant slippage. A limit order, on the other hand, guarantees a price (no slippage), but doesn't guarantee a fill.
Theoretically, you can have "slippage" with a limit-order that's only partially filled. If you're smart/lucky enough to pick a limit-price that the market doesn't trade through and then reverses, do you then "go to the market", pick another limit-price or continue working your original order to get filled on the remaining quantity?
in your original post you mentioned nothing of a limit order. limit orders do not by definition have price slippage. Limit orders may actually have slippage depending on how your broker routes them, and their timing with market movements. Note: a limit order may only have slippage when the market is moving against them.... otherwise, they simply will not be filled, which can be an equally significant problem. Slippage refers to the fact that one cannot trade a stock necessarily for what it most recently traded for. This is do to the facts that in all markets a spread exists, market depth is finite, and that a small and varying amount of time passes between the time any order is issued and when it is filled. This is especially obvious when a winning backtested strategy is executed in real time. As for market orders, try and purchase 10 billion shares of a stock at once, and you will find out exactly what slippage is.
Two questions: 1. Don't you always buy at the ask and sell at the bid? If you put in a limit order and it gets filled doesn't that just mean that the market has moved enough to meet your price? If so, then it really means that the market has moved against you? Let's say you want to buy at 1.70 but the current price is 1.90. The market would have to move down to meet your price, but in the long run you want it to be going higher. 2. Last Friday (Oct expiration) I put in a limit order to BTC an IC on GOOG about three minutes before closing. I put the order in at $5 which was the natural at the time. I waited about a minute before getting filled, but the TOS screen showed the natural price going down as far as 4.50. Does that just mean there was probably a backlog due to high volume, or did my 5.00 order get executed when it could have been done for 4.50? Isn't a limit order for your price or better?