Orders, Expiration & P&L Basics
Lesson 4 focuses on how orders actually fill, why limit prices matter for options, and what happens to your positions as expiration approaches. We will also cover credit vs debit trades, basic P&L math, and the account concepts that drive position sizing.
Before You Trade
These examples and charts are simplified teaching models. Confirm live pricing, liquidity, and assignment risk in your broker before placing real trades.
Market vs Limit Orders
Options often have wider bid/ask spreads than stocks. A market order accepts the best available price right now, which can be far from the midpoint. A limit order lets you define the worst price you will accept, which is critical when spreads are wide or liquidity is thin.
Market order
Tells the broker to fill immediately at the best price. It prioritizes speed but can result in a worse fill if the spread is wide.
Limit order
Tells the broker to fill at your chosen price or better. It may not fill right away, but you control the maximum price paid or minimum credit received.
Market orders typically fill near the ask for buys or near the bid for sells. Limit orders target the midpoint to reduce slippage.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Rule of thumb
Start at the midpoint, then work the order by 1–2¢ if you need a fill. You can always improve your price, but a market order locks in the worst available price.
Multi-leg Orders (Why Limit Matters)
Multi-leg spreads (like verticals, iron condors, or calendars) involve multiple fills at once. Each leg has its own bid/ask spread. A limit order on the combo helps you avoid getting “picked off” on one leg and losing edge on the other.
A 5¢ difference on each leg of a 2-leg spread can reduce a $1.20 credit to $1.10. That is an 8% hit on the potential profit.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Combo order
A multi-leg order sent as a single ticket. It fills only if the whole spread meets your net credit or debit requirement.
Legging in
Filling each leg separately can occasionally improve pricing but exposes you to directional risk if the stock moves between fills.
Slippage & Spread Costs
Slippage is the hidden cost of paying the ask when you buy or hitting the bid when you sell. Even a small spread adds up across multiple trades. Managing slippage is a major part of consistent trading.
If your average slippage is 8¢ per trade, 20 trades in a month can cost $160 on 1-lot contracts. (Each 1¢ is $1 per contract.)
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Spread awareness
When the bid/ask is $1.00 x $1.40, the midpoint is $1.20. If you buy at the ask, your position starts with a $0.20 ($20) loss per contract.
Expiration & Assignment
At expiration, options are either in-the-money (ITM) or out-of-the-money (OTM). OTM options expire worthless. ITM options are typically exercised automatically, which can create stock positions or assignment.
As expiration nears, extrinsic value decays toward zero. Any remaining option price is mostly intrinsic value.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Assignment
If you are short an ITM option at expiration, you are assigned. For short calls, you may have to sell shares. For short puts, you may have to buy shares.
Exercise
Exercising a long option converts it into stock: call holders buy shares, put holders sell shares. Most brokers auto-exercise ITM options at expiration.
Early assignment
Short calls can be assigned early when a dividend is coming or when the option has very little extrinsic value left. Short puts can be assigned if the holder wants to sell shares early. Manage risk by closing or rolling positions before assignment risk spikes.
What happens at expiration? Your broker checks if each option is ITM by at least $0.01. ITM options are auto-exercised, which creates a stock position (long or short 100 shares per contract). OTM options expire worthless and disappear from your account.
Cashflow & P&L Basics
Options trades can be either debit (you pay premium) or credit (you receive premium). Your risk and reward are defined by the strategy. Understanding max profit, max loss, and break-even helps you size trades responsibly.
Debit trades
You pay to enter (e.g., buying a call). Max loss is the premium paid. Profit potential is usually larger but requires a move in your favor.
Credit trades
You receive premium upfront (e.g., selling a spread). Max profit is capped at the credit, but the probability of profit can be higher.
Example payoff for a 100/95 bull put credit spread with a $1.20 credit. Break-even is 100 - 1.20 = 98.80.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Unrealized P&L changes while the trade is open. Realized P&L is locked in once you close or expire.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Break-even & max profit/loss
Break-even is the stock price where your trade changes from losing to winning. Max profit and max loss are defined at entry for most options spreads. Always confirm these numbers before placing a trade.
Position Sizing & Account Basics
Your account type affects what you can trade and how much capital is required. Cash accounts require full payment for long options or stock, while margin accounts can provide leverage and allow defined-risk spreads with lower buying power requirements.
Cash account
Trades must be fully funded. You can buy options or sell cash-secured puts, but you cannot use leverage for spreads unless fully paid.
Margin account
Allows borrowing and defined-risk spreads. Brokers set buying power requirements based on max loss, volatility, and your approvals.
Buying power is the capital required to hold a position. Defined-risk spreads can reduce buying power usage compared to naked options.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Position sizing
Many traders cap risk per trade (for example 1–3% of account value). Always compare max loss to your account size before entering a trade.
How Greeks Move Option Prices
Greeks describe how option prices change. Delta shows how much the option price changes when the stock moves $1. Theta shows time decay and Vega shows sensitivity to volatility. These are the core drivers of P&L between entry and expiration.
If the stock moves $1, a 0.60 delta option gains about $0.60. A 0.30 delta option gains about $0.30.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Theta + Vega in plain English
All else equal, options lose value as time passes (theta). If implied volatility increases, option prices rise (vega), even if the stock does not move.
Trade Execution Checklist
- Confirm strategy type: credit or debit, defined or undefined risk.
- Set a limit price and check the bid/ask spread.
- Know max profit, max loss, and break-even before you click submit.
- Review expiration risk and assignment scenarios.
Who This Is For
Beginners who understand options basics and want to learn how orders fill, what happens at expiration, and how to calculate P&L.
Learning Objectives
- • Explain the difference between market orders and limit orders for options.
- • Understand how slippage and bid/ask spreads affect trade costs.
- • Describe what happens at expiration: exercise, assignment, and expiring worthless.
- • Calculate breakeven, max profit, and max loss for basic option trades.
- • Distinguish between debit trades and credit trades.
Example Walkthrough
Scenario: You sell a bull put credit spread on XYZ ($100 stock). You sell the $100 put and buy the $95 put for a net credit of $1.20 per share ($120 total).
Best case: XYZ stays above $100
Both puts expire worthless. You keep the full credit: +$120.
Worst case: XYZ drops below $95
Max loss = (strike width − credit) × 100 = ($5 − $1.20) × 100 = −$380.
Breakeven: $100 − $1.20 = $98.80. If XYZ is above $98.80 at expiration, the trade is profitable.
Common Mistakes
Using market orders on options
Options often have wider spreads than stocks. Market orders can fill far from the midpoint, costing you significantly on each trade.
Forgetting about assignment risk
Short options can be assigned before expiration, especially when they are deep ITM near a dividend date. Always have a plan for assignment.
Not knowing max loss before entry
Every trade should have a known max loss calculated before you click submit. Undefined-risk trades require extra caution and position sizing.
Quick Recap
- • Always use limit orders for options trades—start at the midpoint and adjust by pennies if needed.
- • At expiration, ITM options are auto-exercised and OTM options expire worthless; know which side you are on.
- • Calculate max profit, max loss, and breakeven before entering any trade—never risk more than you can afford.
Next lesson
Greeks & Volatility 101
Up nextUnderstand the Greeks without the math, see how volatility moves prices, and learn why IV matters.
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