On Thursday, March 7, I hesitated, fingertips over the keyboard, gaze riveted on the RSI of a one-minute RUT chart. What was I doing? It was my adjustment time of day, and I was going to be moving butterflies. It was time for me to sell three of the ones I already had, centered on the 900 strike, and buy three new ones at a higher strike.
I wanted to choose a period when I thought the underlying might be stable for the few minutes it hopefully would take me to get the both trades completed. Over the previous two weeks, I had encountered some slippage when performing similar maneuvers. Slippage is made worse when the markets are moving big.
The slippage wasn't too bad that day, and, in fact, my efforts to choose the right time to buy and sell proved successful. Those efforts don't always prove successful. The snapshot of the account page captures my efforts to buy and sell the three butterflies. Because I had to compress the page, not all the information is legible, but on the far-right column, you can interpret the "Fi" as "Filled" and the "C" as "Cancelled."
What can we see? Starting at the lower butterfly, you can see that I was stepping into moving the flies gradually. I had been watching the difference in the prices of the flies I wanted to sell and the flies I wanted to buy all day, and the difference was mostly running between $8.40-8.60. Most of my trading friends buy the new flies first, but my close study of the charts told me that the RUT might be about to take off to the upside, so I sold a test lower fly first so that I would capture the best possible price if the RUT was about to break higher. If it did, the fly I wanted to buy should get cheaper. The 18.22 limit price was the mark or mid-price between the bid and ask. The trade filled quickly, while I was still deciding on a limit price for the new fly I wanted to buy. That $26.36 price for the new fly was at or near the mid, too, and it didn't fill. My trade's deltas were way out of whack while I was waiting for the fill, and, although I thought up was more likely than down, I didn't want to risk the RUT dropping heavily, making the replacement fly I wanted to buy a lot more expensive. I cancelled that order and replaced it with an order for $26.41. That filled quickly. The difference in the cost of the two flies, of course, was $8.19, less than the $8.40-8.60 range I had been seeing. I was lucky that day.
Later, I moved the final two flies still at the 900 strike up to the 910. This time, I thought the RUT might be reaching a resistance level. I first bought the two new flies at 910, for $25.80. The RUT had climbed, as I had thought it might, between the time I moved the first fly and I was attempting to move the last two. I sold my last two flies at the 900 level for $17.55, then the mark. The difference between the prices was $8.25. I lucked out that day. Not only was the slippage not bad, but also I narrowed the price between the flies from what I had noticed as the typical difference in their costs.
However, for each time the orders work in my favor, it works the opposite way more times. Slippage is a fact of life for us traders. The next clip from my account shows the frustrating tale of my attempts to buy a vertical, a call debit spread. The first attempt is at the bottom of the screen capture.
Slippage in Action:
At 14:16:16 on 3/5, about 44 minutes before the close, I put in the first limit order to buy an APR 890/900 vertical for $7.15. As you can see from the cancelled order and final fill for $7.36, I chased that fill.
Period During Which I Was Chasing a Fill:
The yellow-orange oval outlines the period during which I was chasing that fill. The call debit spread was gaining in value due to the swift rise in the RUT's price. It was my typical adjustment period of day. I needed the debit spread to help even out deltas in my position so that a higher move the next morning would not unduly hurt the position. Going without the delta-raising debit spread would have been a risky thing to do, just to avoid a little slippage. As you can see, I'm glad I took that step and incurred the slippage. I just wish I'd timed my purchase a few minutes earlier.
You can't obsess about things such as that, however. You do the best you can do, but you don't skip a needed and planned adjustment because you're going to incur slippage. Trades such as verticals and condor-rolls of a vertical to a different level may be difficult to fill, but if you can get a fill during a reasonable time period, such trades tend to incur less slippage than completing the trade in two or more separate legs unless you're lucky or exceptionally skilled. On a day when fills are particularly difficult due to fast-moving markets or low volume, you might make the minimal adjustment necessary to protect the trade. Moving fly contracts and incurring $1.00 slippage between the $0.50-higher-than-mark price of the bought flies and the $0.50-lower-than-mark price of the sold ones is going to quickly hurt on your theoretical profit-and-loss page. That page is likely based on mark prices, but that doesn't always represent the prices at which fills are possible. After being filled, you'll be looking at a sudden theoretical loss, but the truth is that you couldn't get a fill at that mark price. Would stabilizing the deltas with debit spreads or by other methods be a better way to go, waiting for volume to return before you move the flies? That depends on days to expiration, whether there's any theta left in those old butterflies, and a multitude of other concerns.
Slippage is a part of trading. I used to day trade, so I used to have decent skills associated with that, but I find trying to employ those skills to avoid slippage to be a pretty useless endeavor, despite my best attempts and my success in the first depicted chart. I'm wrong as much as I'm right because we're dealing with volatility changes as well as price changes. Do the best you can, but do stabilize your trade and just expect some slippage. It's a not-fun part of trading but it's definitely a part of it.
RUT traders in particular have become accustomed to being able to fill near the mark or mid price in recent years, but that wasn't always true of the RUT and may not always be in the future.