Shares of Vimplecom (NYSE:VIP) are trading lower this morning and as we noted last week, any sustained move below $35 should be considered an exit or adjustment signal for conservative portfolios. Readers who are using a combined (net debit) order to exit the spread should be able to close the entire position for $0.40 per contract, based on the current bid/ask spread of the two options. From the CBOE quote page at:
Option Last Change Bid Ask Vol OI
VIPPU 0.50 0.00 0.45 0.65 0 792
VIPPV 1.00 0.15 0.85 1.00 40 1,841
With regard to the VIP play, we recently dissussed "legging" out of the spread to reduce losses and if a trader wants to exit (only) the short option when the stock reaches a specific price, he would use a "contingent" order and enter the stock price ($34-$35?) which he wants to "trigger" the option order. Thus, he would "buy-to-close" the short option, based on a specific stock price.
Another method: If a trader wants to close the short option when it reaches a specific price, he would enter a "buy-to-close" order for the sold option and specify the price, as well as the type of order (limit, stop or stop-limit - described below).
For those of you who are unfamiliar with these order types, we have listed some additional information below. We'll also try to publish some guidelines for trading with OptionXpress in the next week or so. Until then, review the trading tutorial on the right side of the "Options Order Form" of the OptionsXpress website. It has complete explanations for placing basic option trades, contingent trades, and other advanced orders. You can also contact their customer service department for help with order entries.
Common option order types:
Market -- This is an order to buy or sell an option at the current market price. A market order assures an execution but it does not guarantee the price, especially in fast-moving markets where the underlying stock is more volatile.
Limit -- This is an order to buy or sell an option at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. A limit order is not guaranteed to produce a trade if the issue reaches or surpasses the limit price, but using this type of order can help you sell an option at a specific price and protect you from paying too much when you buy an option.
Contingent -- This order is "contingent" on the price of the underlying stock. The option order you specify will be placed only if/when the market price for the underlying stock meets the criteria (greater than or less than a price entered). This means that you can open or close an option position when a stock reaches a desired price, based on its last trade. It is a very accurate method to enter and exit option positions.
Stop-Market -- This is an order to buy or sell an option when the market for a particular contract reaches a specified price, called the stop price. A stop order to buy becomes a market order when the option contract trades or is bid at or above the stop price. A stop order to sell becomes a market order when the contract trades or is offered at or below the stop price. Contrary to popular belief, a stop order on a volatile option will not guarantee an execution at or near the stop price.
Stop-Limit -- This is an order to buy or sell an option at a specified price or better, after a given stop price has been reached or exceeded. A stop-limit order to buy becomes a limit order when the option trades or is bid at or above the stop-limit price. A stop-limit order to sell becomes a limit order when the option trades or is offered at or below the stop-limit price. Since a stop-limit order is a combination of a stop order and a limit order, it will execute only if the option is thereafter offered at or below the ask price for buy orders, or at or above the bid price for sell orders.
(In short, if you use a stop-market order and the underlying issue trades at or below the stop price, the order will become a market order and it should be executed within a relatively short period. This is not the case with a stop-limit order. If you use a stop-limit order and the issue moves too quickly to trade at the limit price, the order will not be executed at all.)