Secret 80SECRET SPREADING TACTICS
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Even though I strongly suggest using spread orders to enter
and exit spread positions, since the advent of the internet, I usually
don’t use spread orders but rather leg in and leg out of positions.
In other words, I will execute one side of the spread first
and then the other side. This practice ensures an execution of the
spread and, if done right, usually at a better price than a spread
order.
However, there is always the risk of losing control of the
spread and taking a big loss. Therefore, legging into and out of a
spread should be avoided in a fast moving market.
Nevertheless, with the speed and immediate feedback possible
on the internet, such spreading tactics can work very well.
Here is how to enter such trades. Let’s say that you want to enter
an IBM debit spread where you buy IBM April 50 call priced at
2–2.5 and sell the IBM April 55 call priced at 1–1.25 Usually you
enter the buy side of the trade first so you are not naked at any
time. You first would enter an order to buy the IBM Apr. 50 call at
2.25. Give it a few minutes, and if the order has not been filled,
move the limit to the asked price of 2.50. Enter the second order
to sell the IBM Apr. 55 call. First enter an order to sell at 1.12 between
1 and 1.25, but then immediately change it to a market
order.
Your danger, here, is that IBM might move against you before
you can get the second leg of the trade off. So, again, avoid
fast moving markets. Spread orders are always the safer way to
go, but if you use spread orders, always use a limit order.
Even though I strongly suggest using spread orders to enter
and exit spread positions, since the advent of the internet, I usually
don’t use spread orders but rather leg in and leg out of positions.
In other words, I will execute one side of the spread first
and then the other side. This practice ensures an execution of the
spread and, if done right, usually at a better price than a spread
order.
However, there is always the risk of losing control of the
spread and taking a big loss. Therefore, legging into and out of a
spread should be avoided in a fast moving market.
Nevertheless, with the speed and immediate feedback possible
on the internet, such spreading tactics can work very well.
Here is how to enter such trades. Let’s say that you want to enter
an IBM debit spread where you buy IBM April 50 call priced at
2–2.5 and sell the IBM April 55 call priced at 1–1.25 Usually you
enter the buy side of the trade first so you are not naked at any
time. You first would enter an order to buy the IBM Apr. 50 call at
2.25. Give it a few minutes, and if the order has not been filled,
move the limit to the asked price of 2.50. Enter the second order
to sell the IBM Apr. 55 call. First enter an order to sell at 1.12 between
1 and 1.25, but then immediately change it to a market
order.
Your danger, here, is that IBM might move against you before
you can get the second leg of the trade off. So, again, avoid
fast moving markets. Spread orders are always the safer way to
go, but if you use spread orders, always use a limit order.