Power of the GTC order

The GTC (Good-Till-Cancelled) order is one of many current advantages that today’s individual investor and trader have that their senior generation might wish they had when starting out.  The GTC order, when coupled with other advantages such as lower commissions and online trading, give the individual investor and trader an almost enviable edge over institutional traders. The advantage I am referring to is the property of the GTC order to help the individual investor or trader guard against one of the greatest hurdles to successful trading – GREED (see ‘How To Trade’).  Folks who have been investing or trading for a length of time will remember instances when a profitable trade ended up becoming a losing trade because they wanted to ‘wait just a little bit longer’ before closing the trade.  All successful traders plan their trade, and then ‘trade their plan’, which includes deciding when to ‘close the trade’ or sell the stock.  By using a GTC that is placed at the time of initiating the trade, the successful trader ensures that s/he will not be tempted into staying in the trade longer (and potentially turning a winning trade into a losing one). Another advantage of the GTC order is that it allows one to take advantage of the transient spike (wide ranges) of stock price movement that occur daily, and can close a trade out at a greater profit that if one were only to be watching the end of day prices.

One of the best ways to show this advantage is with an example, so I am going to detail a trade that best exemplifies the power of the GTC order. Although this trade is from a few years ago and is likely one of my best examples of the power of the GTC order, the principles at work are the same today as they were then.  I currently routinely use GTC orders to automatically close positions in my trading.

Explanation of Methodology:

This trade was a ‘momentum’ trade, an attempt to take advantage of the leverage of options to benefit from modest price action.  Let me detail my thoughts during the trade for the benefit of readers who might be beginning investors or newbie traders.

1. On 7/15/2009, the price graph of CLR caught my attention – the stock had made a low in the previous week, and then gapped up. Deciding on a ‘momentum play’, I bought 40 OTM calls at $0.10 (Figure 1) – ‘cheap’ call options that could easily double if CLR made a run up in the next few days. This strategy illustrates one of the advantages that option traders have over ‘pure’ stock investors – one does not need to buy the stock (a major capital investment) to make money (buying options create a small but defined risk limited to the debit paid).
2. Once the trade was filled, I immediately placed a GTC limit order to sell half as many of the calls at twice the price (i.e. $ 0.20).  If this trade were filled, it would reduce my risk substantially (to the costs of trading – i.e. commissions and fees). The astute reader will wonder why I did not place a GTC limit order for a higher amount (to also cover the costs of trading) – the short answer is that merely doubling the limit price keeps the calculations simple. One could if one chose calculate the exact price to ensure that the entire debit was recovered with the GTC limit order.
3. On 7/28/2009, a mere 13 days later, the stock price rose to 33, and my $ 0.20 GTC limit order was filled and I was informed via email (Figure 2).  I then placed another GTC order, this time a GTC stop order to sell 10 call options if the stock price reached 40.
4. On 8/6/2009, CLR opened at 36.77 and hit an intraday high of 40.26 and closed the day at 36.93 – this perfect setup illustrates the power of the GTC order – when the price crossed 40 my GTC stop order became a market order, and my OTM calls were sold (Figures 3a and 3b).
5. Finally, the price action after 8/6/2009 suggested that upside potential was limited, so, on 8/18/2009, I sold the remaining 10 calls rather than risk them expiring worthless (Figure 4).

BOT 40 Sep 45 calls

GTC Limit order triggered

GTC Stop order triggered

GTC Stop order executed

Closing Trade

CLR Trade Details

CLR Trade Analysis

Review:

So, it was a profitable trade – I made a 220% profit (return on risk) in 34 days, which would equate to a 2364% annualized rate of return (although, this would not be a fair statement, as not all such trades are as profitable) (see Tables above).  However, the above trade demonstrates how the individual investor and trader can successfully use technology to his/her benefit and take advantage of the market’s erratic price action. As before, I’ve added the broker confirmations as a way to authenticate that these are real-world strategies that work, and not theoretical fantasies. I welcome comments on my system, and look forward to learning from other’s experiences.

Happy Trading!