I entered a regular butterfly on a stock 3 weeks ago with the idea of closing one week prior to earnings. Time decay never kicked in even though the position had a 3 digit theta, negative vega almost 1/10 of theta and almost neutral delta. After almost 2.5 weeks of holding, shouldn't the position show some profit? IV is high because of the ramp up to the earnings. Another thing, I set up a stop loss as a market order tied to the stock. When it was finally triggered, the butterfly was going for $13 but I got filled in at $5 since it was a market order. It never happened before. If this is how it happens, then I have to sit in front of the computer all the time as I won't know the limit price of my butterfly when my stop loss price is reached. How to handle this situation? appreciate any advice. Thanks
Yep, many people bet on increase in IV prior to earnings, so trying to collect theta before earnings may not work. I don't know anyone who uses stops with options. Options are bets with clearly defined risk that doesn't need stops. Same with market orders: you should not be trading options using market orders. No, you don't need to sit in front of the computer all the time because everyone else trades options without sitting in front of the computer all the time, and without using stops, and without using market orders. If you're in a casino and make a bet, then you are not allowed to change your bet, or run around the table and try to adjust something, or yell "stop!" Theoretically you can come back an hour later to check whether you won or lost. Options give you an advantage that you can occasionally adjust them or hedge them, or exit early (without a need for stops), but this doesn't change their nature and doesn't mean that you need to do all kinds of things that no one else is doing. So learn how to trade options like everyone else
Can you get an alert when your intended exit criteria is met? instead of using an exit at market order, you could try to get a better fill?
Yes, I will put up a price alert from now onwards and try to get a better fill on my phone app, if I can't get to a computer. Lesson learned!
I will not be using market orders even when they are tied to stock prices anymore. Lesson learned the hard way but it seems wrong. The price of my butterfly was $14 when my stock stop loss price was hit. Then how can the order, even if it's a market order execute at $5 at that time? Actually, I was at the computer watching the prices when the stop loss was hit.
Similar scenario happened to me a couple weeks ago on spy butterfly spread. I got stopped at very unreasonable fill above my stop but far below where the spread was trading. I called the TDA immediately, they researched it thoroughly and filled for correct price of spread at the time.
Because it's a market order, meaning "any price" (within the bid/ask spread). Did you look at the bid & ask prices on those options? Market price simply means the worst price that meets the bid or ask, or any better price that someone else is willing to pay. Market orders execute at any price that the market offers. Market makers purposely set very wide bid/ask spreads to make profit off mispriced orders, or anything they can get cheap. Sometimes you may get a better price, but usually not the best price that you could get when you decide what price to pay or sell at.
Unfortunately, TD Ameritrade did not correct this absurd fill of $5 when the butterfly was going for $16. I tried my best pointing out that this was absurd but they did not budge.
What does "correct price" mean? There is no such thing, especially in hindsight. You are trading with someone else and the other person that sold or bought your options can also dispute "correct" price and argue that a different price is "correct". Some trades can by cancelled/busted within short time but not adjusted to some imaginary "correct" price because two traders need to agree on the price. TDA might've done you a favor one time and gave you a small credit, but can you imagine 100,000 people calling Ameritrade and complaining that they are buying stuff at wrong prices? Ultimately you are responsible for your own trades, not someone else.
I see your point and agree that's how real world works and it was my mistake for giving the market maker a reason to fill me at way below market but it was just 1 contract and a matter of few hundred dollars. That market maker is not going to buy a Ferrari with these few hundred dollars. Some people would do the right thing and correct it and some won't. That's ok. Live today to trade tomorrow and not make this mistake again. That's the lesson here.