I’ve read a few option books.
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Sunday, March 22, 2009

Limit-If-Touched (LIT) Order

Limit-If-Touched (LIT) is an order to buy / sell a security when the market reaches / touches a predetermined price level (i.e. Trigger Price) that is lower than current price for buy order, or higher than current price for sell order. This order is held in the system until the Trigger Price is touched. Once Trigger Price is touched, the order will be submitted as a Limit Order to buy / sell at the specified Limit Price or better.
The same advantage & disadvantage of Limit Order apply to LIT Order as well.

There are 2 types of LIT Order:
a) Buy Limit-If-Touched (Buy LIT) order is an order to buy a security at Limit Price or better (i.e. at Limit Price or lower for a buy order) if the market price of the security goes down to the Trigger Price, which is lower than current market price of the security.
Once the Trigger Price is touched, the order will turn to a Limit Buy Order, to buy at the predetermined Limit Price or lower.
The Limit Price should be set at least the same as or lower than the Trigger Price.

b) Sell Limit-If-Touched (Sell LIT) order is an order to sell a security at Limit Price or better (i.e. at Limit Price or higher for a sell order) if the market price of the security goes up to the Trigger Price, which is higher than current market price of the security.
Once the Trigger Price is touched, the order will turn to a Limit Sell Order, to sell at the predetermined Limit Price or higher.
The Limit Price should be set at least the same as or higher than the Trigger Price.

Example:
A trader identifies an ascending triangle pattern in Stock ABC. He believes that if the price rises and breaks a certain price benchmark (i.e. the breakout level of the ascending triangle pattern), it will continue to increase further. However, he also expects that the stock will make pullback first to the breakout level before continuing its upward movement.

Suppose that the breakout price is $80. The stock has already broken out that level, and is currently trading at $82. The trader wants to enter into a long position to buy only if the price makes a pullback to the breakout level. However, he also wants to enter at a slightly better price than that, and also does not want to carry a risk of entering at uncertain price.
He then submits a Buy LIT order with a Trigger Price at $80 (lower than current price of $82) and Limit Price at $79.90. His order will remain in the system until the Trigger Price is touched. If the stock does make a pullback and touches $80, the order will then be submitted as a Limit Order to buy the stock at $79.90 or lower. If the market price never goes down to $79.90 or lower, his order will not be executed.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Learning Candlestick Charts
* Learning Charts Patterns

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