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/