Nick’s Note: When it comes to reading the daily activity of the market, few are better than longtime PBRG friend and master trader Jeff Clark.
Over the years, he’s predicted the 2005 gold correction… the 2011 gold crash… the August 2015 market correction… the January 2016 market correction… the 2016 gold boom… the December 2018 mini-crash… and the January 2019 market bounce.
One of the reasons his technique is so effective is because it’s simple. And today, he shares an easy-to-follow rule that can save you a lot of money…
By Jeff Clark, editor, Delta Report
If you’re an options trader, you could be making a big mistake…
It’s one that could cost you a lot of money. And there’s a simple way to avoid it.
Let me explain…
When buying and selling options through your broker, you have two choices in how to make the trade.
The first is a limit order. Buying an option using a limit order means your buy order will only be filled at or below the price you enter as your limit. For example, if you set a limit order to buy call options for $2, your order will only be filled if you can buy the calls for $2 or less.
Selling an option with a limit order means your sell order will only be filled if you can collect at least the price you enter as the limit. For example, if you set a limit order to sell call options for $2, your order will only be filled if you can collect at least $2.
So with limit orders, you run the risk of not being able to get into or out of a trade right away. But it’s much better than the alternative…
You see, the other option is a market order. In theory, buying an option using a market order means your buy order will be filled as quickly as possible at the best available price. Selling an option using a market order means your sell order will be filled as quickly as possible at the best available price.
Like I said, that’s how a market order is supposed to work, in theory. In reality, using a market order—even in the most liquid environment—is like flashing $100 bills and singing “I’m in the money” while strolling down the most dangerous streets of Compton, Detroit, or Baltimore at two o’clock in the morning.
You’re going to get ripped off!
You see, when we buy or sell options, options market-maker firms are often the ones selling them to us and buying them from us.
An options market maker is a firm that stands ready to buy and sell options on a regular and continuous basis at a publicly quoted price. Market makers keep the markets flowing.
Options market makers make money by profiting on the bid-offer spread of options (the difference between the prices at which a market maker buys and sells a security). For example, if a market maker buys a call option for $1.90 and is willing to sell it for $2, the bid-offer spread is $0.10.
The larger that market makers can make this spread, the more they’ll profit. And that’s what’s so dangerous about market orders.
I used to consult with one of the country’s largest options market-maker firms. Many of the guys at the firm would sit at the bar after a long day in the pits and tell stories about how they screwed someone who entered a market order on a large block of options.
They’d see the market order hit the screen and all of them would instantly pull their bids and offers from the market. Then, they’d discuss what price to execute the ticket at and how to divide up the trade. Finally, they’d fill the ticket at an obscene price—maybe 20% away from the previous price—and get back to trading as usual.
That same routine occurs with small orders, too—especially right at the opening of the market.
Yes, that’s collusion. Yes, that’s a prohibited practice. And yes, there are rules against it. But there are also rules against driving more than 65 miles per hour on most of this nation’s freeways. Yet nearly everyone still does it.
To see how damaging this can be to your trading account, let’s look at an example…
Let’s say some call options are trading at $1.90 bid and $2 ask. If you use a limit order to buy two call options at $2, it will get filled for $2 or less, assuming the price doesn’t change in the few seconds it takes your broker to submit your order ticket. Since each call option covers 100 shares, buying two will cost you $400 or less.
But let’s say you use a market order instead. Thanks to some market-maker collusion, you end up buying the calls for $2.40—20% higher than the last trading price. Now, it’ll cost you $480. (And you’ll also likely end up the subject of one of the stories shared at the bar later that night.)
The same holds true for selling options. In the above example, you can use a limit order to sell your two calls at $1.90. Again, as long as the price doesn’t change within a few seconds, you’re going to get the order filled at $1.90 or more. So you’ll collect at least $380 on your two calls.
But let’s say you use a market order. The market makers step away from their bids, only to come back with a bid 20% less than the previous price. So instead of selling your calls for $1.90, you end up selling them for $1.52. Now, you only collect $304 on your two calls.
And even if market orders always worked like they should, you’d still run the risk of buying or selling for a price drastically different from what you intended—especially in volatile markets.
So for your own sake, NEVER use market orders when trading options. Only use limit orders.
Yes, you risk not being able to get into or out of the trade right away. But most of the time (probably all of the time), even if you have to move your limit order down or up in order to get an execution, you’re still going to be better off than if you’d sent a market order to the options pit.
Best regards and good trading,
Editor, Delta Report
P.S. This might sound crazy… But I believe I’ve discovered the exact date the stock market will crash this year. The warning signs are everywhere. It’s just a matter of time. And I think it’ll be the worst we’ve ever seen…
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So tomorrow night at 8 p.m. ET, I’ll be holding an exclusive presentation where I’ll reveal this date—along with the one strategy you need to start using immediately if you want to make it through this crash intact.
Plus, if you stick with it, you’ll book a profit while most investors lose everything. And if you want to learn how, all you have to do is reserve your free spot to my special event right here.
The praise for Teeka’s guidance through Crypto Winter into “spring” continues…
From Clayton F.: Teeka, just wanted to share a note of thanks for all of your work on our behalf. You’ve stayed with us through Crypto Winter—and you didn’t run or hide. I respect and admire your character and core values. I’m grateful. Many thanks.
From Brett T.: Teeka, you’re the best! I’m so glad you’re a part of my family’s life. Thank you for sharing your insights and wisdom. All the best to you!
From John L.: I love PBRG writings. And I’m thankful to be connected with Teeka and the gang. You guys are helping me climb out of my financial disaster last year. Also, the crypto stuff has been growing well. Many, many thanks for that.
From William T.: Teeka, Teeka, Teeka… Thank you!
Teeka will be holding a live Q&A webinar in the coming days to address your questions—including those about the massive crypto rally. And you can send them to him right here. Stay tuned.
This is your exclusive invitation to join your favorite PBRG gurus in Southern California at the second annual Legacy Investment Summit during September 23–25.
Join some of the smartest minds in finance—like our very own Teeka Tiwari… legendary speculator Doug Casey… and master trader Jeff Clark—for their exclusive, in-person insights.
For a limited time, you can secure your tickets for hundreds less than what everyone else will pay. And to find out how, just read on here.