Hello everyone, and welcome back to Option Alpha in this video tutorial for market on
close orders or MOC orders.
What we’re going to do is actually just quickly review some market order basics because
that's basically all that these market on close orders are, is just a market order executed
at the end of the day.
Let’s go over market orders.
They’re orders that are used to guarantee an execution time, but not guarantee a price
or time of execution.
With a market order, you’re going to be executed at a nearest market price.
As soon as you enter that order, it’s going to work instantly to execute anywhere possible
and immediate.
And we guarantee that we’re going to get into the market, but we don’t guarantee
the price.
As always, the benefits is that you're sure that you’re going to get into the market,
but the position will be a little bit riskier because you have no control over the actual
price.
With an MOC or a market on close order, that order buys or sells at the market price at
the close of the trading day and what happens is that the close of the trading day, all
of the options are hit market on close.
All of the orders go into the market as close to the end of the day as possible and executed
at the end of the day.
Let's say that you actually wanted to get out of the position by the end of the day,
but you had some other obligation or you are at work or you had something with the kids
or you had to step away from the computer.
You could actually enter a market on close and still possibly keep some upside gains
if the market is rallying.
Let’s say you have some calls and the market is rallying away from you and you want to
keep that upside, but you do want to get out at the end of the day.
Well, this would be the order that you would enter.
Now, typically most brokers like Thinkorswim require that you actually have these orders
in by 2:40 central standard time or 3:40 eastern standard time and the same risk apply.
Let’s actually go at my Thinkorswim platform here and take a look at an actual market on
close order.
You can see I have Google up right now.
Google is trading at 588.
And let’s say that we actually already own a long 600 strike call on Google.
We want to get out of this trade, but not right now.
It’s up today and we want it to continue to go higher, so we want to keep some of that
upside potential.
And right now, this option is trading at 24.10, so we’d enter at the bid to sell this option.
It’s trading right here at 24.10, the 600 strike.
And instead of putting a limit price, we’re actually going to change this to an MOC or
a market on close.
And you can see that the price now goes away and it’s replaced by this MOC which means
that it’s going to be filled at the end of the day.
As long as we enter this order in enough time for the broker to get the order into the system
and queued up for the end of the day, then we will be out of this trade right at the
end of the day.
Now, this could be a higher price than 24.10 where it’s trading at right now, it could
be a lower price than 24.10.
It’s whatever the end of the day price is.
That's really the risk that you have with the market on close.
I'm not too keen on using market on close orders.
I have to be honest with you guys.
I rather have a limit on close if you’re going to do that and make sure that you get
out of a price you know you’re going to be safe with.
The market can turn around instantly and you might even not want to get out of this position.
It might be a long-term hold and you actually get stuck getting out of it at a very, very
bad price at the end of the day.
I think it’s usually good to have this in your back pocket just in case you need it,
but it’s usually not the best order that you want to enter when you’re trading options.
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