I recently just received a question from a member about trading options with Limit orders. I thought these were good questions so I thought of writing a blog entry to share the answers with everyone.

In the example, the member picked DJWQU, a PUT option on the 1/100 Dow Jones Index (Symbol: DJX) with 125 strike and expiring on May 17. The 1/100 means that the strike prices are 1/100 of the actual DJIA, so in this case, the 125 strike actually refers to 12,500 points on the DJIA. Since the DJWQU is a PUT option, the option will become In-the-money (ITM) when the DJIA goes under 12,500.

At this time, the DJWQU option is reporting a Last price of $0.14, and a Bid/Ask of $0.16/$0.25 respectively. So if someone places a Limit order to buy contracts of DJWQU at $0.15 or less, will that order get filled right away?

Given the above situation, the short answer is NO ...

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I recently received a couple of member messages asking why they lose money on the Balance Sheet the moment they bought a stock or option.

The short answer is that it is because there is a Bid/Ask Spread for everything. So what is the Bid/Ask Spread?

If you look at any quote (e.g. click here to see a quote for GOOG), you will notice that besides the Last Price, there is also a Bid and Ask Price. The Last Price simply refers to the price at which the last trade was made, but that does not necessarily mean the price that you will be paying for your trade.

What you really should be looking at are the Bid and Ask Prices. The Bid Price is the current price at which someone is willing to Bid to buy shares from you. Conversely, the Ask Price is the price at which someone is offering to sell shares to you. In other words, you buy at the Ask Price, and you sell at the Bid Price.