Yes, we don’t allow market orders on stock options as most stock options are very illiquid, which means the bid-ask spread is quite high. Let me explain with an example.
Assume stock X is trading at Rs 100. Say you decide to buy 110 calls of this month (lot size 5000) expiry. You add 110 calls that you see LTP of Rs 0.5 on your watchlist. I am in a hurry to buy this call and decide to place a buy order without looking at the market depth. I decide to buy 5 lots, knowing the maximum I will lose is Rs 12500 (25000 x 0.5).
Assume only 1 lot is being offered at Rs 0.5 and the rest 4 lots at Rs 5 (this is an illiquid contract). Now, 1 lot gets bought at Rs 0.5 and the rest 4 at Rs 5. So suddenly instead of Rs 12500, Rs 1,02,500 gets blocked in this trade ( 0.5 x 5000 + 5 x 20000). If I want to sell it immediately, the best offer is around 0.45. I just lost Rs 1lk because of the liquidity.
You might think that this doesn’t happen often, but it was a daily affair for us when we were allowing market orders on stock options. We have had many clients complaints after executing the trade.
Even though there is no market order, you can use a limit order like a market order. Place a buy order with limit price much higher than LTP or place a sell order with limit price much lesser than LTP, limit order will automatically turn into a market order. The good bit here is that the limit price you enter will act as a protection and ensure that your order won’t get executed beyond this price.