When newer students are testing strategies, I’m often asked about how trade execution and slippage effects “actual” results. The answer is… it depends.
Let me explain. Trade execution is an art, a negotiation between two parties. The sales person or market maker is going to give you two prices, one you can definitely buy the option for (ask) and one you definitely can sell the option for (bid). The difference in these prices is called the bid/ask spread. Option Vue with the “no slippage” setting assumes that that execution prices will be in the middle of that spread or at “mid” prices.
So the question becomes, “How much more or less than mid prices can I actually get executed at?” And the answer is that live execution prices are going to be highly dependent on your negotiating position and your negotiating skills.
For example, if you were a day trader or a swing trader who bought breakouts, then your negotiating position is “I want it and I want it now!” and you are attempting to buy the position at a time when everyone else wants the same thing. This creates a situation where you have no negotiating power which means you’ll pay very close to the ask price. If this is your type of trading, then you’d want to include a lot of slippage in your testing.
On the other hand if you are a good complex options trader, you’re generally executing positions that you don’t “need “, you’re patient, and you execute positions when they seem to be going “against you”, or “for the market marker”, then your negotiating position is “I can take it or leave it” and if you do that at a time when the market maker would rather not have it, then you can often get executed significantly better than mid prices. If this is your style then you’d want no slippage in your calculations.
The reality is that with the type of trading I do and the way I time my orders, I execute at the same or significantly better prices than Option Vue shows with no slippage about 80% of the time. And I do worse about 20% of the time. This means that most months actual execution prices average better than Option Vue mid prices. Therefore there is no need to calculate slippage into back trading our type of trading.
That said it does take some knowledge, time and practice to learn how to execute properly. The tools needed to learn execution of complex options spreads are taught in the M21 program as well as within my coaching programs. For more information visit https://www.lockeinyoursuccess.com/
John Locke
Hi John,
My name is Dennis Moore and I have been dabbling in the Market for many years. I have a brother Chuck Moore who has purchased a few of your classes and listens in to your options tribe discussions. I started listening to your Monday morning free discussions about 6 months ago. I was laid off my job a year ago and have now been trading the M3 about 5 months now. I have accounts at ThinkorSwim and understand their software but it was brought to my attention the the greeks are not right. My brother Chuck showed me and I was stunned and disappointed on TOS. I got the trial version of OptionsVue and took a test drive and figured I had to spend the money and purchase the software if I was going to be trading the M3 and trade it right. I did and Now for my question. I am not a paying member of yours so if you don’t reply to no members I will surely understand. I had been doing better with my M3 but I asked a few people and got different answers from them all. All close but all one thing or another different in the setup of OptionVue. Do you have it documented anywhere I could get my hands on to make sure I am looking at the same greeks you are? Thanks for the time and from one x auto technician to another, Are you not glad not to be twisting wrenches everyday to make a living? I sure am
Dennis Moore