Explore Your Options by Tom Gentile
GIVEN THE SLIP
How can I best ensure against slippage on an option order?
If youíve been trading long enough, you probably have learned about slippage the hard way. Two good ways to guard against this enemy of profits is to deal in options with strong liquidity characteristics and stay clear of market orders whenever possible.
As for a stockís options providing strong liquidity: Average daily contract volume, large open interest, and tight quoted call and put markets are the three components that we can use as measures against unjust slippage. Having one of these characteristics in place is no guarantee of the other two. Without all three in place, without a contract month thatís new to the board, thereís a strong chance that what looks to be worth trading today, all else being equal, might not be so at a later date.
In addition, you might want to go back to earlier trading sessions and look at contract volume on any given day. Knowing how both larger and smaller traders are vested is better than a situation with the same volume but with all the activity stemming from one group. Block prints that occur with regularity can paint a distorted picture of liquidity, for example, as could a large amount of retail trading thatís there one day but gone the next due to the likes of a newsletter recommendation.