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Lesson 8: Execution on an Orderbook (How You Lose Money Quietly)

Promise: Understand bid/ask, spreads, and why execution quality matters.

The Orderbook Basics​

Options trade on an orderbook just like spot markets. Understanding it matters if you want to stop losing money to execution costs.

Term
Definition
When Used
Bid
Highest price someone will pay to buy
You sell at the bid
Ask
Lowest price someone will accept to sell
You buy at the ask
Spread
Ask - Bid
Your immediate cost
Mid
(Bid + Ask) / 2
Theoretical "fair" price
💡

Your first loss is usually the spread.

The Spread Is Your Cost​

When you trade, you cross the spread:

  • To buy: you pay the ask (higher than mid)
  • To sell: you receive the bid (lower than mid)
Action
Price You Get
vs Mid
Market Buy
Ask ($1,050)
-$50
Market Sell
Bid ($950)
-$50
Round Trip
Both
-$100 (full spread)

If you market buy and immediately market sell, you lose the entire spread. This is why execution matters.

Slippage: Walking the Book​

When your order is larger than the quantity available at the best price, you slip into worse price levels. This is called "walking the book."

The best ask might be $101, but if there are only 3 contracts there and you want 15, you'll fill:

  • 3 at $101 (best price)
  • Then 5 at $102 (worse)
  • Then 7 at $103.50 (even worse)

Your average price ends up higher than you expected. The difference is your slippage cost.

Market Buy Order15 contracts
15
135
Bids
5$100.00
8$99.50
12$99.00
20$98.50
25$98.00
Spread
$1.00
Asks
$101.003/3
Fill
$102.005/5
Fill
$103.507/8
Fill
$105.0015
$107.5030
Execution Breakdown
1
3 × $101.00
$303
2
5 × $102.00
$510
+$1.00/ea
3
7 × $103.50
$725
+$2.50/ea
Expected
15 × $101.00
$1515
Actual
15 × $102.50 avg
$1538
−$23
$1.50 slippage per contract
Your order exceeded the 3 contracts available at $101.00
💡

Slippage is invisible until you measure it. Always check depth before sizing up.

Market vs Limit Orders​

Order Type
Execution
Best For
Market Order
Immediate at best available
Speed critical, tight spread
Limit Order
Only at your price or better
Wide spread, can wait

Market Order​

  • Executes immediately at best available price
  • Crosses the spread (you pay for speed)
  • Use when: speed is critical, spread is tight

Limit Order​

  • Executes only at your price or better
  • Improves price (you provide liquidity)
  • Use when: spread is wide, you can wait
Order Type
Pros
Cons
Market
Guaranteed fill, instant
Pays spread, can slip
Limit
Better price possible
May not fill

Liquidity Varies​

Not all options are equally liquid:

More Liquid
Less Liquid
ATM strikes
Deep OTM/ITM wings
Near expiries
Far expiries
BTC/ETH
Smaller underlyings
💡

Illiquidity looks like "bad luck" until you measure it.

Before trading:

  1. Check the spread
  2. Check depth at best bid/ask
  3. Consider if your size will move the market

Tick Size​

Orders must be placed at valid price increments.

  • Tick size is defined per instrument
  • Invalid prices are rejected
  • Check GET /instruments for tick size

Example: If tick size is $5

  • Valid prices: 1,000,1,000, 1,005, $1,010
  • Invalid: $1,003 (rejected)

Execution Tips​

Do's
Don'ts
✅ Check spread before trading
❌ Use market orders on wide spreads
✅ Use limit orders on wide spreads
❌ Trade large size in illiquid options
✅ Place orders at or slightly inside the spread
❌ Ignore execution costs in P&L calculations
✅ Be patient on illiquid options
❌ Chase fills by improving price repeatedly

Common Mistakes​

Mistake
Correction
Using market orders on wide spreads
Wide spread = expensive. Use limit orders or accept the cost consciously.
Ignoring spread in strategy analysis
Include 1 spread cost per leg when analyzing multi-leg strategies.
Trading illiquid wings
The "cheap" deep OTM option may cost you 20% on the spread alone.
Not knowing tick size
Check instrument specs before placing orders to avoid rejections.

Test your understanding before moving on.

Q: If bid is $95 and ask is $105, what's the spread?
Q: If you market-buy and immediately market-sell, what happens?
Q: When might a limit order not fill?

💡 Tip: Try answering each question yourself before revealing the answer.

See Also​

Navigation: ← Lesson 7: Basic Strategies | Lesson 9: Expiry & Settlement →