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Slippage in Options Trading

Table of Contents

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

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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

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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?

Bid Ask Paper Trading Mode #

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

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Now every position entry and exits will be recaliberated to the Best Bid and Best Ask. checkout the video below

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