Selling options below bid on Robinhood

Question

If you sell an option for cheaper than what is someone willing to pay, does Robinhood sell it for the best price or for the price you chose to sell it?

I'm trying to figure out if I can do stop loss on in-the-money options. I know it sounds stupid for doing this during a trading session but all I'm trying to do is sell for the best price right when the trading session begins in the morning.

UPDATE

I finally received an answer from Robinhood and they will in fact try to sell it for the best price on the market even if you shoot yourself in the foot and sell it at a higher loss than what it's worth

Answer 1

I would not recommend using a stop order at the open for options, especially at the open.

Because options are 'derivative' contracts, they are based on the price of the underlying. Only after the underlying exchanges have opened, do the options exchanges open. And usually then, only a few market participants will actually participate in the opening rotation - usually those that have to, such as Primary market makers.

The view of market makers is that participating at the open is risky - there can be a lot of wild swings in the underlying as people send in large orders in the underlying, which may in turn cause changes in price.

During liquid trading conditions, in-the-money options typically follow the price of the underlying, but are still subject to the maximum spread ($5.00) with each option being for 100 shares. Your stop-loss could go off, but at $5.00 below what it is worth, or $500 per options contract.

During illiquid trading conditions (e.g. immediately after or at the open), the market maker may not be there at all, you could get executed at significantly worse prices. People have been executed at $0.01 in the past...

If you sell an option for cheaper than what is someone willing to pay, does [your broker] sell it for the best price or for the price you chose to sell it?

Brokers are obliged to follow the National Best Bid or Offer (NBBO). Executing a trade outside of the NBBO is called a trade-through, and a prohibited practice.

I'm trying to figure out if I can do stop loss on in-the-money options.

Most brokerage platforms may allow you to send in such an order. That does not mean that doing so is wise.

all I'm trying to do is sell for the best price right when the trading session begins in the morning.

I would suggest instead to figure out what the option is worth, and submit the order, gradually decreasing the price using a limit order. Looking at historical market data, you may be able to see when the spread is narrowest (difference between the bid and offer), and determine the times typically after the open that the market is most competitive.

If it is urgent, use a marketable order (i.e. the price of the order to sell is lower than the best bid on the market). At least you can set the worst price your order could get traded.

Answer 2

There are 6 types of stop orders available at my broker. I have no clue how many of these orders Robinhood supports. The more common ones are:

A Stop order is a buy or sell market order if a stop trigger price is attained or penetrated. A Stop order is not guaranteed a specific execution price and may execute significantly away from its stop price. A Sell Stop order is placed below the current market price and is y used to limit a loss or protect a profit on a long stock position. .

A Stop-Limit order is a buy or sell limit order executed when a trigger price is attained. The order has two basic components: the stop price and the limit price. When a trade has occurred at or through the stop price, the order becomes executable and enters the market as a limit order, which is an order to buy or sell at a specified price or better.

A sell Trailing Stop order sets the stop price at a fixed amount below the market price with an attached trailing amount. As the market price rises, the stop price rises by the trail amount but if the stock price falls, the stop loss price doesn't change, and a market order is submitted when the stop price is hit.

A Trailing Stop Limit order allows you specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain. A sell trailing stop limit moves with the market price and continually recalculates the stop trigger price at a fixed amount below the market price, based on the user-defined "trailing" amount. The limit order price is also continually recalculated based on the limit offset. As the market price rises, both the stop price and the limit price rise by the trail amount and limit offset respectively, but if the stock price falls, the stop price remains unchanged, and when the stop price is hit a limit order is submitted at the last calculated limit price.