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Is there a best strategy for calculating limit price on a vertical spread? Using the average of the bid and ask prices seems to lead to a lot of orders that do not get executed.

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It's more likely that you'll get a fill near the midpoint if the options have a decent amount of daily volume. However, that's no guarantee. I've seen liquid option series where they don't budge an inch as well as fairly illiquid ones where they split the bids more often than not.

When placing an order for a vertical, start at the midpoint. If you don't get a fill, gradually move the price away from the midpoint (higher if buying and lower if selling). Move price as much as you're willing to yield before concluding that the spread isn't desirable. If it's a must have position, you have to pay up. If you're seeking a good fill, you can work the order.

Be aware that the circumstances may affect your willingness to accept price current price or something close to it.

For example, in March I owned a lot of protective puts that went ITM. Since I wanted to maintain protection, I used vertical combo orders to book gains, rolling the long strikes down.

Because of share price volatility and because the long puts were ITM, a reversal in the underlying could result in losing a chunk of ITM profit. So at times, chasing a 5 or 10 cent better fill could result in losing much more on the long option. You have to weigh the trade offs.

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  • When you say "higher if buying and lower if selling" which category would a call credit spread fall under? -Thanks!
    – user121900
    Commented Mar 2, 2023 at 14:27
  • You buy debit spreads and you sell credit spreads. So if trying to sell a credit spread and it doesn't get filled, lower the order's price if you still want the fill. Commented Mar 2, 2023 at 22:06

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