It is one of the more frustrating things in short-dated trading. The index reaches the level the trade was aimed at. The resting sell order on the option does not fill. Price turns, and the gain that was on the screen is gone.
Why it happens
A limit order to sell fills when a buyer pays that price. The ask touching the limit is not a trade. The option’s bid has to come up to the order, or a buyer has to lift it, and at a brief touch of a level neither may happen.
The second cause is the estimate. A trader who sets a limit on the option when the trade is opened is guessing what the option will be worth when the index reaches the target. That value depends on how long the move takes. A same-day option loses time value by the minute, so a target reached late is worth less than the same target reached early. The order was priced for a faster move.
Two units
The underlying problem is that the plan and the order are written in different units. The plan names a level on the index: a wall, the flip, the edge of the expected move. The order names a premium. The link between them shifts through the day with time and with implied volatility. The same question arises for stops, in whether to put the stop on the option or on SPY.
Two ways to resolve it
The first is to let the level govern. When the index reaches the target, the trader exits at the price the option is fetching at that moment, usually with a marketable limit order. The exit happens. The premium received is whatever it is.
The second is to let the premium govern. The order rests at a set option price and fills only if the market pays it. The price is controlled. The exit is not certain, and the trader accepts that the level can be hit without it.
Neither is correct in general. The mistake is to hold both ideas at once, expecting the level to produce the premium.
Partial fills
With more than one contract, the order can fill in part. Some contracts are sold at the target and the rest are still open when price turns. Partial fills covers the mechanics. The plan needs a line for the remainder, or it becomes a new trade nobody decided to take.
Decide before the entry
The choice between level and premium belongs with the other exits fixed in advance, in the way pre-committing exits describes. One sentence does it: at the level, I exit at the market’s price. Or: I exit only at this premium.
The levels on Trader are index levels: the flip, the walls and the expected move on SPY, QQQ and IWM. A plan built on them is a plan in index units, and the order has to be written to match.