Prepare yourself. Sometime or another, it's going to happen. You're going to make a mistake when placing an order. You're going to place an order to buy a spread when you intended to sell one or vice versa. You may buy twenty butterflies when you intended to buy two. Worse, you may place a limit order and get a decimal wrong.
Why is getting a limit order wrong by a decimal often worse than the other mistakes? That depends on which direction you got that decimal wrong, doesn't it? Sometimes you can undo an error placing an order relatively painlessly, even if the order filled, but this one can't be undone once it's filled. I'll explain what I mean with an example.
Imagine that you began with the trade depicted below, opening a five-contract RUT 19 DEC 14 iron condor on Thursday, November 16. This iron condor is considered a high-probability iron condor or one in which there's a high-probability that the RUT's prices will be inside the expiration breakevens at expiration.
Theoretical RUT Iron Condor, Established 36 Days before Expiration, Graph by OptionNet Explorer:
This iron condor theoretically would have brought in a little over $1.22 per contract with the put side bringing in more premium than the call side. Two-way commissions would have cost $50.00 if those commissions were $1.25 per contract.
When I was trading iron condors, I closed those trades down before expiration since there was so much risk due to outlandish settlement values. Moreover, I starting trying to close any side as soon as the mid-price of the spread on that side narrowed to $0.20. You have to keep the trade open too close to expiration to collect each nickel and dime after the spread has narrowed to $0.20. I often put in GTC (good till cancelled) orders to buy-to-close the call and put spreads as soon as my iron condor order filled. I certainly placed that order once the prices narrowed close to $0.20 if I hadn't previously placed the GTC order.
Option Chain Showing Open Strikes the Afternoon of December 14, Chain from OptionNET Explorer:
On the call side, we can see that the spread of the mid-prices had narrowed to $1.10 - 0.75 = $0.35 on the afternoon of November 19. If this had been an actual and not a hypothetical trade and I hadn't already put in my GTC order, I would certainly have done so when I was reviewing that trade the next morning before the open.
What would have happened if I'd accidentally entered that buy-to-close order for that spread at a limit of $2.00 instead of $0.20? It would have filled immediately upon the open the next morning! At the open, the mid-price of the spread was $0.925 - $0.60 = $0.325. Ouch! That would have hurt, to pay that extra $0.125 more than I intended to pay. However, I wasn't going to pay only $0.325, was I? Why would someone fill the trade for the midprice of $0.325 when I was seemingly willing to pay $2.00?
What would I have actually paid? Let's look at the bid and ask for this spread and remember that I would be buying-to-close the spread.
While I don't have the historical information, I can estimate what the bid and ask might have been by looking at the bid and ask figures for a spread about the same number of days away from expiration. This spread features call options spread ten points apart with a mid-price about equal to the mid-price of the spread in question. The deltas of the strikes in question are about the same, too, as those in this hypothetical trade on that morning. Implied volatilities aren't far apart. In other words, I have replicated the conditions as well as I can to estimate where the order might have filled.
Example Market Depth Reading from Think-or-Swim for a Spread about the Same Number of Days to Expiration with the Similar Mid-Price and Deltas:
This similarly situated vertical spread is almost certainly going to fill on the CBOE, and the bid and ask for that spread are $0.15 and $0.65, respectively. If I'm not bargaining--and I certainly wasn't bargaining if I'd accidentally placed an order with a limit of $2.00--I'm going to pay $0.65 for the privilege of buying-to-close that spread. That's not $0.20 as you intended! The price of $0.65 happens to be more than the $0.625 theoretically earned when the spread was sold-to-open when the iron condor was initiated. This hypothetical iron condor trade is now officially swamped. My goose is cooked. I can't call the trading desk and plead stupidity and get my brokerage to break the trade. I did it.
Hypothetically, I did it. Only, this is a mistake I actually made with a bigger size iron condor than 5 contracts. I made this mistake after I'd been trading more than a decade. It was probably because I had become so comfortable setting up those GTC trades that the mistake was made. I read what I expected to read when I glanced over the trade that morning before the open. I didn't read the limit I'd actually placed. I also missed a couple of steps I should have taken, such as checking to determine if the cost of the buy-to-close trade was what I expected it to be.
What do you do when the alert dings and you're happy, thinking that you've locked in profit on that side of your trade, only to check the confirmation and have your stomach sink to your toes when you realize what you've done? You take a few deep breaths. You confess to someone who will let you talk it through, a trading partner or group. You tell yourself what I would tell you if I were sitting in your office: you're human. Unless you're different than any other human I have ever known, you're going to make mistakes. Depending on your personality, your reaction to an unexpected shock and your experience level, it might not be a great idea to immediately try to undo the trade before you give yourself a few seconds or minutes.
Mistakes like these fall into two categories: those you can undo without much harm and those you can't. Imagine that your premise had been one fine day that AAPL was going to climb after testing support on a five-minute chart. AAPL tests that support and then prints a couple of small-bodied candles right at support, halting its decline. It's time to move and take part in the expected short-term rise, according to your scenario. Only, you put in an order to buy five AAPL ATM puts when you meant to buy 5 AAPL ATM calls. You are horrified when the order immediately fills. However, you see that while testing support, AAPL has slipped just a little lower. Your didn't-intend-to-buy-them puts are actually making money! Whew! Your heart is pounding, but you think you'll hold onto those money makers!
Stop right there. Think about your original premise. Take a breath. Feel the gratitude as you place the order to sell-to-close the puts you never meant to buy. Then step away from the computer and reassess. You were just gifted with a get-away-free pass on your mistake, but it was a mistake since it violated the premise under which you had entered the trade, the scenario that had guided your entry.
What if, before you could do anything, AAPL took off higher, just as you thought it was going to do when you set up your trading scenario? Now you're stuck with those puts that are rapidly losing money? Again, you are human, you made a mistake, but you had a trading scenario that you need to revisit. You need to exit but you need to do so in a calm manner so that you do not make further mistakes. Believe me, I've known traders who get so rattled that they complicate their first error by making a second one. Get up from your trading desk if you're so rattled that your hands are trembling. Take a deep breath. Adopt a power pose for one or two minutes: spread your arms in a victory salute or stand with arms akimbo as if you're Superman or Wonder Woman. Don't sneer at the idea. Research shows that such a stance lowers your cortisol or stress hormones.
Now, plan your exit from those puts you mistakenly bought. Refer back to your original scenario, plotted out when you were calmer. Did that scenario envision AAPL breaking out of a key level and screaming higher? Did the scenario include the idea of a day when AAPL climbs leisurely along a key moving average, periodically pulling back to retest that average? My advice would be to exit as soon as you're calm enough to place the trade without making another error. However, if your scenario and the underlying's price pattern fit a scenario of a calm move back and forth that would allow you to exit with less pain on am expected small pullback, you might make the choice to wait a few minutes to determine whether that scenario is unfolding.
However, remember again that you're not human and you can't predict what would happen. Me, I prefer to take my lumps right away.
We all accept that the trading business is going to include some losing trades. It's harder to accept that some of those losses may be because we placed a fat-fingered trade, didn't pay enough attention or bought what we meant to sell. However, unless you're different than any other trader I've ever known, that is absolutely going to happen. Think about the possibility now. Prepare mentally for it to happen.