When you're entering an option trade (whether buying to open or selling to open), there are a few different ways to achieve this goal. You can set parameters on your cost of entry, the life span of the order itself, and even the manner in which your order is filled. Here, we'll discuss the most common types of orders you can place with your broker, along with the pros and cons of each.
The market order is a very broad direction to your broker to buy (or sell) to open the options in question. The primary advantage here is speed, since there are no restrictions placed on the entry price. Most market orders will be filled the same day, and often quite quickly. However, since the trade will be executed at the prevailing market price, you lose some control over the cost of entry. This can be a significant disadvantage if the underlying stock is moving rapidly.
The limit order specifies a given price at which you're willing to buy (or sell) to open the option contract(s). When buying to open, you'll generally provide a maximum entry price, and the trade order will not be filled unless your broker can do so at or below this stated price. When selling to open, conversely, you'd use a minimum entry price, and the order would not be filled unless your broker can collect an amount equal to or greater than this premium per contract.
The primary advantage of the limit order is the ability to maintain tight control over your entry price. On the down side, you may have to wait longer than you'd like for the order to be filled -- or, if the stock doesn't cooperate, your order may be filled either partially or not at all.
A day order specifies that your current request is valid only through the end of the current trading session (or the next trading day, if the order is placed after-hours). In other words, if the order cannot be fulfilled by the close of trading, it will be considered null and void. If a day order goes unfilled and you'd still like to enter the trade, a new order must be placed the following day.
Unless otherwise specified, trading orders are generally assumed to be day orders. The advantage is that the expiration of a day order can be a signal that the market is moving against you, allowing you to reconsider a trading idea whose logical time has passed. However, if you simply need a day or two longer to achieve your target entry price, it can be a hassle to continue placing day orders over and over.
The good-til-canceled (GTC) order has a longer shelf life than the day order. Rather than expiring at the close of trading, this order remains in effect either (a) until it's been executed in full or (b) until you've canceled it. The order doesn't stay open indefinitely, however; each brokerage firm typically has a predetermined period of time after which the order will be cleared from the books -- for example, 60 days. Check with your individual broker to clarify their usual procedure for GTC orders.
If your order is not particularly time-sensitive, a GTC order might make the most sense. This longer-term solution saves you the trouble of placing multiple day orders. On the other hand, if you're not a particularly organized trader, you run the risk of forgetting about a GTC trade order that's lain dormant for a while. Another possible risk is that your order may be filled piecemeal over the course of several different sessions, which can potentially rack up multiple commission charges.
As the name suggests, the all-or-none (AON) order specifies that your trade is to be filled either in its entirety, or not at all. The major advantage of the AON is that it saves you from ringing up multiple commissions if an order is filled gradually over the course of several days. That said, the AON can also delay the fulfillment of your order, if there's insufficient supply to meet your demand. In the worst-case scenario, your order may not be filled at all.
The one-triggers-other (OTO) order is particularly useful for those trading option spreads with multiple legs. This format allows you to place an initial order (e.g., buy to open a put option) and then place another order (e.g., sell to open a put option at a lower strike) that's contingent upon the execution of the first. This ensures that your entire spread will be entered as a unified whole, and prevents any complications that may arise from an incomplete execution of the trade.