Hi Everyone, I was wondering if some kind soul out there could help me out. I am trying to figure out if I bought a put what I would have as a stop loss. I was looking at this earlier so I will use this one as my example: So if I thought the DIA etf was going to go down right now and I wanted to buy a Nov put with a strike of $149 it would cost $4.75. The delta is -54.1 and the gamma is 4.0. The etf is currently @ 148.25 and my trade idea would be invalid if it rose to 150, a gain of 1.18%. So how would I calculate a stop loss for this? Do I just use the 1.18% so if the option declines 0.57 then I exit? Or do I use the gamma and delta. This where i get really confused. I keep reading about option pricing and the more I read the less I know If I read everything right if the etf moves to 150 then the $1 increase will decrease the value of my option by 0.54. So if the etf moved from 148.25 to 150 the my stop loss should be Option price - (amount of decrease * delta) or 4.75 - (1.75 * .54) So would a stop loss of $3.75 be right? Please excuse my ignorance, I am just starting to learn about options. They have always baffeld me so I decided that I was going to learn them this year. Thanks you for all your help and patience. I really do appreciate anyone taking the time to help a total newb!
you could value the option every day with an underlying of 150 and place a stop at that price. I get 3.5 for today using inputs ... expires 10/17/13 imp vol .2 rate .037 strike 149 underlying 150 european
This may not be the answer you are looking for, but I sometimes place an exit on an option play based on the price of the underlying.
you can build a condition based on the underlying, when the underlying hits the specific level, the option order is triggered. norammly the volume is low for options, you may need a stop limit to avoid too much slippage, or use ALERT to manually kill the trade. for example, DIA at 150, you bought DIA 150 put, it drops to 147.5,and you thinks it will drop more, technically if it bounces from 147.5 and even pentrate 150, you will think your trade is invalide, so your stop loss is at 150.2, because of time decay/premimum distortions, you cant cut loss based on option chart, so you can build a conditional order (if DIA>150, your option sell order is triggerred). watch out, option slippage is huge (some times there is no execution, while stop loss order is triggerred based on price execution, lots of time there is no execution!) DIA options are low volume, better avoid them. trade SPY is better. or AAPL
Thanks guys for all of your input. I have traded DIA as a stock but fell in love with the idea of having a set amount of risk per trade, hence the options. I never even thought to look at the volume of the options, I just assumed since I have never had a real problem with fills in the etf that the options would be the same. I think that i will drop the idea of using options for this, and maybe try my idea out on apple or the spy like you said. I have a pretty decent directional strategy, 50% win rate with the winners averaging double the losers going back 2 years, and thought that options would be a great way to not tie up so much capital on each trade. I was also looking at the mini options yesterday. Seems interesting although I now have to go back and look at the volume On the ones I do go with I will take your advice and stick to the more liquid options and set the option to sell if the underlying stock hits a price point with a limit order. I will also set an alert so that I can make sure I get out
Oh and I am not actually live trading these right now, probably not until next year. I need some time to learn these more, makes my brain hurt!
do not paper trading. that is waste of time. only when there is strong direction,trade that direction. in those either or situations, options are the worst to trade. normally I will trade options with news or tchnical breakout. I did not trade SPY today, I trade CRM's call option.
Here is an idea. Maybe instead of the underlying, it should be based on your option entry price. Why? This is not a stock. Options suffer massive decay. Does you no good if the underlying doesn't go against you, but time goes against you. With a 3 day weekend, it may have been wise to exit any long option position rather than suffer the decay.
If IV is high and HV is contracting (generally after large moves), those "either or situations" are ripe for short straddles/strangles, iron condors, or butterflies.
Personally I use theoretical options pricing to calculate my stop loss. If your are using TOS the calculaion is built right into the platform. If not you can google theoretical options calculator and some decent ones will show up.