In options trading placing the orders could be challenging especially if you are novice in the market. As there are different types of orders you can place in the option market and if you are using the Algo to trade in the option market, you can find all types of orders. Knowing about all orders is not necessary, but a few of them are very useful in Algo trading.
Understanding the order book and types of orders that can be placed in trading is important for traders to utilize the market conditions to place the most suitable order based on the trend and market situation. The order book shows the order placed while buying and selling a security, but it doesn't show the type of order, that is known only to traders, brokers and the exchange.
What is an Order Book in Trading?
The order book is the list of orders that represents the different orders placed by the buyers and sellers to trade in a particular security. The order book shows the bid and ask price with the quantity at which buyers and sellers are ready to place their orders.
On the Indian stock exchange, you can see usually top 5 best bid and ask price with their quantity. As soon as the top one order is executed, the next orders shift to upper side and new order is added in the top 5 list. The order type could be different types but they are shown in the similar format here in the order book to streamline for uninterrupted execution.
Types of Orders in Option Trading in Algo
Usually, there are two types of orders – limit orders and market orders that are used in the cash market, but in option trading there are more types of orders. And if you are using the Algo trading for options you can find more types of customised order types that you can use at the time of placing the orders to make your option trading more effective.
Basket Orders
In option, trading Basket orders will allow you to place and execute the entire option strategy at one click. The basket order type helps to reduce the time and effort required to place multiple orders one by one which also reduces the risk of the execution.
Also Read: How to Manage or Do Risk Management in Options Trading
In Algo trading software like Algo Test, you can simply select and add the strike price you want to place in the option chain. You have to click on "place all orders" to execute all the selected strike prices in one click. The basket order in option trading is very useful, as in various option strategies you have to enter into multiple types of orders at the same time.
Market Order
A market order is one of the most common types of order also used in options trading in which an order is placed to execute at the market price. In a market order, you don't need to specify your price, you need to disclose the quantity and place the order.
In Algo trading, while placing the orders in option trading you can use the market orders. In the Algo Test using the strategy builder, you can specify the types of orders within your basket order. Market orders are usually executed unless there is no liquidity in the market.
Limit Order
Aftermarket orders, limit orders are other popular types of orders also used in options trading. In a limit order, the order is placed with the specified price, and when the price of the buyer and seller match in the order book, it is executed immediately. However, the execution of limit orders is not guaranteed, as the price of the seller should match the price of the buyer, and obviously, the buyer wants to buy security at a lower price and the seller wants to sell the same at a higher price.
In option trading, you can use the limit orders that also ensure the price at which the order is likely to be executed. However, limit orders are open either it is executed manually modified or cancelled, or you can also set the time of limit orders. In Algo trading for option strategies, you can use the limit orders todefine a specific price range for your trade.
GTC Order
In stock market, trading GTC stands for “good till cancelled” is the type of order that indicates the timeframe within which the trade must be executed. And these types of orders remain open till it is executed or cancelled by the traders. The timeframe of a GTC order could be from one day to many days to be open for 90 days depending on the broker to broker.
You can use the GTC order in option trading with the Algo Test in option trading strategies. However, in option trading using the GTC order could be risky, as when the volatility is high, the order could be cancelled if the stop loss hits due to high fluctuation in price.
Also Read: How to Trade in High Volatile Market: Best Trading Strategies
Bracket Order
Bracket order is the type of order placed during intraday trading only and used in combination with stop loss and target-based orders. Traders use this type of order to automatically square off their position at the end of the market hours. The bracket order means along with the buy order you also have to place the stop loss and target orders at the same time.
Also Read: Option Trading or Intraday Trading Which is Better for You
You can also use the Bracket order in options trading through the Algo Test. Choosing the option strike price and at the time of placing the bracket orders,you need to place two more orders - stop loss and target to exit from your trade position at the end of the day. In the Algo option, trading using the bracket orders could be profitable when volatility is high.
Iceberg Order
The iceberg order is the order type used to place the large quantity of security using the small multiple orders, rather than placing a single large order. The "iceberg" order type is the practice of buying and selling the securities as each order represents “the tip of the iceberg” – of the entire order, making it easier to execute multiple orders.
Placing and executing the large quantity order is not possible, as there would be no single buyer or seller available opposite you, who is offering the same large quantity of orders. In iceberg order, you can divide the large quantity into smaller quantities so that it can be easily executed. In option trading, you can use the Iceberg order but for each order, you have to place the order at different prices that can affect your total cost of transactions in trading.
2-Leg Orders
2-Leg orders allow buying and selling two underlying securities simultaneously with a summation of their prices or using the sum of the ratio of the prices. Algo is a conditional-based order that allows traders to buy and sell in the market based on predefined conditions.
Conditional orders in Indian stock exchange are considered as an Algo trading facility, as they are generated through the server of the broker. However, such an order facility is very useful for traders who don't make buy or sell decisions through an automated strategy.
Also Read: How to Backtest a Trading Strategy in Algo: Backtesting Guidance
Benefits of Order Placement with Algo in Option Trading
High Liquidity: Compared to humans, Algo trading creates higher liquidity in the market due to the capacity to process more orders in less time. Trading with Algo in option trading will make the order placement and transaction more systematic and speedy.
Flawless Order Placement: In options trading you, need to be very cautious while placing the orders, as the option premium price keeps fluctuating at a very high speed. In Algo trading, the system-based order placement reduces the chances of errors in dealing with calculations and market data.
Also Read: What Time Frame is Best for Intraday, Option & Swing Trading
Fast Order Processing: The algorithms can place the orders at a very fast speed making the entire order placement process very fast. This helps to reduce slippage due to price mismatch that occurs at the time of placing and processing the trade orders.
Unbiased Order Placing: In Algo, there is no room for human emotions, hence the order placement is completely free from emotions making the order placement rational. In option trading using the Algo can help traders to stay away from irrational behavioural changes.
User Friendly& Manual Less: In Algo, there is no human intervention as the entire order placement is organized and managed by the system. However, using the Algo for humans is also very easy and user-friendly due to the highly interactive platform developed for trading.
Bulk Order Placement: One of the best advantages of using the Algo in option trading it can place bulk orders simultaneously in less time. In option trading volatility is high and entering into different types of trades as per the trading strategies and placing bulk orders at a faster speed helps to reduce the impact cost that arises due to delays in order placements.
Cost &Effort Effective: Using the Algo in option trading will minimize your human intervention and requirement of other resources that will reduce your overall transactioncost. You are free from order placement and other activities of trading you can use your spare time to analyze various other factors of market and focus more on developing the strategies.
Also Read: Six Advantages of Algorithmic Trading with Algo Trading Tips
Things to Consider While Placing the Orders in Option Trading
Though, in Algo trading the order management is fully automated you need to be careful and keep certain things in mind to optimize the orders for best results. In respect of the same, we brought here points that you need to consider at the time of managing your orders in the Algo, especially when you trade in options market.
Liquidity Factor: Many stocks are eligible for future and options (F&O) trading but unlike the main indices option chain, only a few stocks have sufficient liquidity in the market. Placing the orders in illiquid stocks will stick your trade or compel you to exit your trade position in the loss.
Also Read: How to Select Best Stock for Option Trading: Points to Consider
Bid & Ask Spread: Checking the spread of bid and ask price is very important before placing trade orders. The illiquid stocks might have a huge gap between the bid and ask price, and if you choose to place the order based on the last trading price, it could result in unexecuted orders.
Hedge Your Orders: In option trading, you need sizeablemargins to enter into the trade position. Here you need to hedge your selling position by buying an option or vice-versa. It will not only help you to reduce your losses but also provide you with the benefit of reduced margin. You can use these saved funds from reduced margins to enter into other trades.
Also Read: Why Option Selling is Better than Option Buying: Explained
ATM/OTM Options: Choosing the right strike price in options trading is another important factor you need to consider while placing orders. Choosing the deep in-the-money can cost you high and in case of high volatility the option premium price fluctuates at a very high speed. Deep out-of-the-money options could be risky, as there would be no significant movement in the option premium even if the price of the underlying security moves a lot.
Also Read: How to Choose or Pick the Right Strike Price in Option Trading
Trade with Stop-Loss: Options trading is a very high-risk trade, either you are using the traditional way of placing the orders or trade management or using the Algo trading software you always need to trade with stop loss. Set the condition of stop loss in Algo so that in unfavourable market conditions it can exit from the trade position timely to avoid huge losses.
Also Read: How to Set Target Price and Stop Loss in Intraday Trading
Conclusion
In Algo trading order placement is fully automated but you can manually choose or select the order type as per your trading strategy. In options trading, you can use the basket order, bracket order, 2-leg order or iceberg order as per your option strategy. Order placement and management in Algo help optimize the trading activities to get the best results.
In Algo Test like algorithmic based trading software, you just need to construct your option strategy within thestrategy builder and then decide how to execute the trade. Here you can select the underlying security and then select the right strike price or choose the option strategy with the conditions to place the order and wait and watch for the results.
Also Read: How to Choose the Right Option Strategy in Algo Trading
To trade in options through Algo trading software you can choose Moneysukh, to trade with the most advanced and popular trading platform with the best Algo trading strategies. After opening the demat and trading account here along with the best online trading platform you will also get access to Trade Radar, one of the best Algo trading software in the industry to trade in options with the most dynamic and user-friendly trading experience with unexpected results.
Also Read: How to Start Algo Trading in Moneysukh: A Best Algo Trading Platform
