What is a limit order for options?

Limit orders are used to cap the price at which you are willing to sell or purchase a security.

On a buy order, a limit specifies the most you are willing to pay for a security. For example, if XYZ option is trading at $1.50 per contract and the most you are willing to pay is $1.40 per contract, you can place a limit order at $1.40 and the trade will not take place (“execute”) until there is a seller willing to match your price.

On a sell order, a limit specifies the least you are willing to accept for the sale of a security. For example, if XYZ option is trading at $2.50 and the least you are willing to accept is $2.75, you can set your sell limit at $2.75 and you will not sell your position until there is a buyer willing to pay that price or greater.

Important to consider

The limit order is designed to provide you with price protection, but may not result in an execution if the security cannot be bought or sold at your limit price. It is common for the price of a security to trade through (move so quickly the limit cannot be met) your limit price and the position will not be bought or sold according to your instructions. It’s important to consider these risk factors prior to placing a limit order.