WALK LIMIT® Order

What is the WALK LIMIT® Order and how could it help extend your options trading profitability?

WALK LIMIT® Order - Definition

WALK LIMIT® is a registered U.S trademark of optionsXpress Holdings Inc. covering securities and commodities trading and investment services and software. One of the services offered under the WALK LIMIT® mark is a type of automated limit order that "walks" your order from the National Best Bid or Offer (NBBO) in prescribed time and price increments up to (or down to) the asking price (bid price) in order to save you time while attempting to get the best fill prices for the orders.

WALK LIMIT® Order - Introduction

WALK LIMIT® Order is an options filling order introduced by Optionsxpress.com back in 2012. According to Optionsxpress.com, it is a order designed to "Eliminate the time consuming process of manually modifying Equity Options orders. WALK LIMIT® automatically updates your order to try to get the most favorable price". This tutorial shall explore exactly how WALK LIMIT® Order works in options trading along with its pros and cons.

Why WALK LIMIT® Order?

Options (which is the same with every traded financial instrument) are always bought on the ask price and sold on the bid price (Read more about Options Prices). The difference between bid and ask price is known as the "bid ask spread" and is where Market Makers primarily make their profit (by selling you high and buying back low). For instance, a particular option that is quoted at bid 2.00 / ask 2.20 means that if you wish to buy this option right now, you would buy at the ask price of $2.20 and if you wish to sell this same option immediately, you would have to do it at the bid price of $2.00. This $0.20 difference is the bid ask spread.

Now, what alot of options traders do in order to "beat the ask price", which is to buy that same option for lesser than the ask price, thereby lowering cost and extending profitability, is to set a limit order to buy at a price in between the bid and ask price rather than buy the option at the ask price outright with a market order. As such, an options trader trying to beat the ask price in the above example might set a limit order to buy to open at $2.10, which is in between the $2.00/$2.20 quoted price. Options traders typically do this when the bid ask spread is deemed to be wide.

The problem with setting a price in between the bid and ask price is that options will only fill at either the bid or ask price, never in between. Options traders shooting for a price in between the bid and ask price is in reality betting for a slight dip in the ask price (or slight rise in bid price if selling). The problem with this is that, in a fast moving market, that slight dip (or rise) might actually not happen at all as the bid and ask price continues to rise. This typically forces options traders to start "chasing the ask" in order to fill the trade by cancelling or modifying their existing limit order to a price closer and closer to the ask price until eventually the order is filled at or a higher price than initially expected, sometimes higher than the initial ask price.

Chasing The Ask Price Example Assuming a call option John is buying is quoted at bid $2.00 / ask $2.20 and in order to bet for a better fill, he enters a buy to open limit order at $2.10. Due to the stock moving strongly, the quoted price quickly moved to $2.10 / $2.30. Seeing that chances of his order filling at $2.10 is becoming very slim, he quickly modifies his order (which is quite a time consuming process which could result in further price slippage) to $2.20, which is in between the current bid ask spread. By the time he clicks on the submit order button and the screen refreshes to the order screen, prices have moved on to $2.20 / $2.40 due to the stock rallying very strongly. By this time, John decides that paying $2.40 is better than missing the whole trade and he quickly cancels his limit order and for a market order which promptly fills the trade at $2.40, which is the prevailing ask price. By trying to beat the ask price, John eventually pays $2.40, which is $0.20 more than the initial ask price of $2.20 due to having to chase the ask price.

As such, in order to prevent having to chase the ask, what most options traders do is that they typically only hold their limit order only for a few seconds and if it fails to fill, they quickly aim for a slightly higher price before the ask price starts to move upwards and eventually hitting at the prevailing ask price in order to fill the order before the ask price changes. All of these happens within a matter of seconds. This is called "Walking up the limit price".

Walking up the Limit Price Example Assuming a call option John is buying is quoted at bid $2.00 / ask $2.20 and in order to bet for a better fill, he enters a buy to open limit order at $2.10. After a few seconds, John sees that the order has yet been filled and the stock seems to be moving strongly. As such, before the ask price could change upwards, John modifies his order to the prevailing ask price of $2.20 and filled the trade.

Now, what the WALK LIMIT® Order does is that it automates that process of walking up the limit price for options traders who wishes to do what John did above.

How Does WALK LIMIT® Order Work?

The concept of how the WALK LIMIT® Order work is that once you set up the initial midpoint price between the bid and ask price, the brokerage system automatically "walks" your limit order upwards by a fixed amount every few seconds until eventually the ask price when the order was initially placed is reached. At that point, the WALK LIMIT® Order becomes an ordinary limit order fixed at the ask price for the duration of the trading session.

WALK LIMIT® Order Concept Example Assuming a call option John is buying is quoted at bid $2.00 / ask $2.20 and in order to bet for a better fill, he enters a WALK LIMIT® Order at $2.10. John sits back, relax and see the order automatically changes from $2.10 to $2.11 after two seconds (there's nothing to do manually and therefore no slippage due to order modification time lapse). The trade still fails to fill and the order automatically cancels the last order and places a new order for $2.12. This process continues every two seconds until eventually the ask price of $2.20 is hit. At this time, since the ask price of this option is still $2.20 as only 20 seconds have passed, the trade is filled.

A WALK LIMIT® Order works by automatically cancelling the original limit order and replacing it with a new limit order at a slightly higher price according to a fixed price increment schedule every few seconds until the original ask price of an option is reached. At that time, the order changes to regular limit order at the original ask price of the option. The current default setting in optionsxpress.com is for the WALK LIMIT® Order to "walk" every 2 seconds at an incremental price that results in 11 iterations to the ask price for a total of 22 seconds (this is true at the time of writing and may be subject to changes). The beauty of the WALK LIMIT® Order is that walking up the limit order manually so many times within such tight span of time could be literally impossible as it already takes more than 2 seconds to hit the button to modify your order manually.

How Does WALK LIMIT® Order Work in Optionsxpress.com?

Now that we know the mechanism of how WALK LIMIT® Orders work in general, lets take a look at how it works in Optionsxpress.com. At the time of this writing, WALK LIMIT® Order is offered only by Optionsxpress.com but seeing that it is a sound and useful advanced order type, other online options brokers may one day offer this order type as well. In Optionsxpress.com, WALK LIMIT® Order is offered for all options strategies - single leg to options spread trading.

Start Price: The price at which the first WALK LIMIT® Order will be placed at. This need not be the midpoint price but must be equal to or greater than the prevailing NBBO bid price (or ask price for credit spreads) but lesser than the End Price and the prevailing NBBO Ask price (bid price for credit spreads). Basically, this can be a price anywhere from the bid price (or ask price for credit spreads) upwards to the End Price. This would be pre-filled with the NBBO midpoint price by default. Options traders can either allow the system to determine the default parameters or customise the following parameters to their own needs:

End Price: The final price at which the final limit order would be placed at. This need not be the prevailing NBBO ask price (or bid price for credit spreads) however, it has to be equal to or lesser than the ask price and greater than the Start Price. Basically, this can be a price anywhere between the Start Price and the Ask Price (or bid price for credit spreads) but not exceeding the Ask Price (or bid price for credit spreads). This would be pre-filled with the NBBO ask price (or bid price for credit spreads) by default.

Price Increment: This is the amount increment each time the WALK LIMIT® Order changes up to if each limit order isn't filled within the Time Increment. You can enter any amount increment here but is limited to a total of 30 increments between your Start Price and End Price, so some calculation may be needed before changing this. This would be pre-filled with an amount that allows for 11 iterations by default.

Time Increment: This is the amount of time lapse before the WALK LIMIT® Order system changes up (or down for credit spreads) to the next limit order according to the Price Increment. You may not set this at more than 60 seconds. This is set at 2 seconds by default.

It is interesting to note that if you use the maximum Price Increment and Time Increment, Optionsxpress.com's WALK LIMIT® Order allows you to create an order that walks for 30 x 60 seconds = 30 minutes before turning into a final limit order that will last the rest of the trading session.

How To Setup WALK LIMIT® Order in Optionsxpress.com?

Setting up a WALK LIMIT® Order in Optionsxpress.com is fairly simple:

Step 1:
Click on the TRADE tab and then "All-In-One Trade Ticker"

Step 2:
Click on "WALK LIMIT®" under the PRICE box.

Step 3:
If no customization is desired, simply click on "Preview" and "Place Order" under the default parameters. If you wish to customize the parameters, click on the link that says "Customize" beside the START PRICE and END PRICE. After that is done, simply click on "Preview" and "Place Order". (Click here for specific Quick Start Guide by Optionsxpress.com )

Advantages of the WALK LIMIT® Order

Here are some advantages of the WALK LIMIT® Order:

1. Made possible multiple limit order changes within humanly impossible time intervals

2. May result in a better filling price than the prevailing ask price (or bid price for credit trades)1. In extremely fast moving markets, it may result in missing the whole trade.

Disadvantages of the WALK LIMIT® Order

Here are some disadvantages or limitations of the WALK LIMIT® Order:

1. In extremely fast moving markets, it may result in missing the whole trade.

Trading Level For WALK LIMIT® Orders

Since the WALK LIMIT® Order is available for all option strategies, a client will need to have a trade level of 1 or above to utilize a WALK LIMIT Order.