What is slippage?
Slippage refers to difference between expected price of a trade and price at which the trade is executed.
How does it impact Options Trading?
Option contracts may be subject to large spreads (Best Ask – Best Bid) due to illiquidity. Your Paper Trader must account for this spread when placing paper positions. Take for example, this Options Chain on Bitcoin in Deribit
If your Paper Trader is entering and exiting positions at Last Traded Price, it may sometimes provide inflated P&L results. Lower the liquidity, more inflated are the perceived results Look at this example
Best Ask = $180
Best Bid = $140
Spread = $40
LTP = $176
Any Paper Trader that works simply off LTP will assume entering the position at $176 when in reality a market order will execute at $180 (best case). A loss of $4 in real world compared to the virtual trading world So how does OptionsDesk manage this?
Options Desk comes with two modes of Paper Trading
1. Last Traded Price Mode (Entry and Exit at LTP) -> Default
2. Bid-Ask Mode: Entering LONG @ Best Ask, exiting LONG @ Best Bid. Entering SHORT @ Best Bid, exiting SHORT @ Best Ask
Now every position entry and exits will be recaliberated to the Best Bid and Best Ask. checkout the video below
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