Secret 75THE HIDDEN COST OF TRADING
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When we talk about the cost of trading, we usually think of
commissions, but there is an even greater cost of trading, and
that is slippage. Slippage is the difference between the bid and
asked price. The bid price is what you can sell the option for, and
the asked price is the price you need to pay to buy the option. For
example, if the bid and asked price on an option is 1 at 1.3, you
can sell the option for 1, but must pay 1.3 to buy it.
With options, slippage can be a good percentage of the price
of the option. In our example, .3 is the slippage, which can be as
much as 30% of the price of the option. In casino parlance, there
is the take along with the commissions, and in casinos, the take
or house advantage on roulette is over 5%. It can be much higher
when you are trading options due to slippage.
In conclusion, when you trade, you must do everything you
can to reduce slippage. This means you must reduce the number
of trades that you make because every trade that you make incurs
a slippage cost. That is why I don’t like complicated trades where
you enter and exit too many positions. Also, when you trade
cheaper options, slippage is higher because it is a much higher
percentage of the option cost.
How do you reduce slippage? Keep it simple, minimize your
trading and try to trade options with more liquidity, options with
good volume that trade more often. Here the spread between the
bid and asked price is not as wide.
In addition to slippage, commissions can sneak up on you
and bite you, Option trading involves a lot of trades, so you must
get the lowest commissions possible. If you do not, you will not
survive.
If you are paying more than $5 per option in commissions,
you are in real trouble. Try to avoid paying more than $3 per option.
Go with brokerage firms that have a low minimum commission.
There are many brokerage firms on the internet that offer
low rates.
TEST THE WATERS WITH LIMIT ORDERS
AND USE THE PRIORITY ADVANTAGE
When we talk about the cost of trading, we usually think of
commissions, but there is an even greater cost of trading, and
that is slippage. Slippage is the difference between the bid and
asked price. The bid price is what you can sell the option for, and
the asked price is the price you need to pay to buy the option. For
example, if the bid and asked price on an option is 1 at 1.3, you
can sell the option for 1, but must pay 1.3 to buy it.
With options, slippage can be a good percentage of the price
of the option. In our example, .3 is the slippage, which can be as
much as 30% of the price of the option. In casino parlance, there
is the take along with the commissions, and in casinos, the take
or house advantage on roulette is over 5%. It can be much higher
when you are trading options due to slippage.
In conclusion, when you trade, you must do everything you
can to reduce slippage. This means you must reduce the number
of trades that you make because every trade that you make incurs
a slippage cost. That is why I don’t like complicated trades where
you enter and exit too many positions. Also, when you trade
cheaper options, slippage is higher because it is a much higher
percentage of the option cost.
How do you reduce slippage? Keep it simple, minimize your
trading and try to trade options with more liquidity, options with
good volume that trade more often. Here the spread between the
bid and asked price is not as wide.
In addition to slippage, commissions can sneak up on you
and bite you, Option trading involves a lot of trades, so you must
get the lowest commissions possible. If you do not, you will not
survive.
If you are paying more than $5 per option in commissions,
you are in real trouble. Try to avoid paying more than $3 per option.
Go with brokerage firms that have a low minimum commission.
There are many brokerage firms on the internet that offer
low rates.
TEST THE WATERS WITH LIMIT ORDERS
AND USE THE PRIORITY ADVANTAGE