Slippage
Slippage in stock and option trading refers to the difference between the expected price of a trade and the actual price at which the trade is executed. It typically occurs in fast-moving markets, during high volatility, or when there is low liquidity, and it affects both market orders and limit orders (though less for the latter).
🔍 Why Slippage Happens
Market Orders: You instruct to buy/sell immediately at the best available price. But if the price changes between order submission and execution, you may pay more (buy) or receive less (sell).
Low Liquidity: If there aren't enough orders on the other side at your expected price, your order may "eat through" multiple levels of the order book.
High Volatility: Prices move quickly, so even milliseconds of delay can result in different execution prices.
📉 Example – Stock Trading Slippage
You place a market order to buy 100 shares of XYZ stock. The last quoted ask price was $50.00.
But during the few milliseconds it takes to execute, the price jumps to $50.15.
Your order gets filled at $50.15, not $50.00.
Slippage = $0.15 per share × 100 shares = $15 total slippage.
📈 Example – Options Trading Slippage
Options are often less liquid than stocks, so slippage is more common.
You want to buy 10 contracts of a call option with a bid-ask spread of $2.00 – $2.20.
You place a market order, expecting to pay around $2.10.
But due to low volume and a quick price move, your order fills at $2.25.
Slippage per contract = $0.15. Total slippage = $0.15 × 10 contracts × 100 (each contract = 100 shares) = $150 total slippage.
🧠 Key Takeaways
Slippage isn't always bad—in some rare cases, you may get a price better than expected (called positive slippage), but usually it's negative.
To minimize slippage:
Use limit orders
Trade during high liquidity hours (e.g., market open/close)
Avoid illiquid assets or wide bid-ask spreads
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