I feel like such a noob asking this question but I want to know who is right. Isn't a Stop Loss triggered when the MARKET trades at the stop price? I was long 4 BK Dec 35's @ .75 when they gapped up Monday. Sold half the position on Monday and protected the other 2 with a Stop/Limit @ $4.40/$4.40 My position sold at the open today at $4.40. I checked the bid/ask which was at $4.50 X $4.70 with good size. (I wouldn't have used a stop loss for an option if the liquidity wasn't there) My 2 contracts made up 100% of today's daily volume in the Dec 35's. How is that possible? How was my stop triggered? Called Scottrade, he said when my order was executed the BID was $4.30. Can a BID alone trigger a stop? PS: The Dec 35's closed at $4.30 X $4.50 so no harm done but I am curious all the same.
The only dumb questions are the ones you don't ask I don't think stop limit orders are native to CBOE, BOX, thought I think they are native on ISE. So Scottrade must be emulating the order for you and they may trigger the stop if the bid is through your stop price. But you said it's a liquid option, so it seems pretty likely that trades went off through your price as well. Maybe check time & sales to be sure?
Oh - almost forgot BK was trading precisely at $39.38 at the moment your option trade was executed. I can not comment on the Scottrade logistics and there appears to be a .20 spread between bid/ask, so with everything considered and the fact that I confirmed the calls were sold for $4.40, everything appears to be in order.
Yes the bid alone will trigger stop or stop limit order on an option. This is due to the fact that option contracts do not always trade a lot and their pricing is not determined so much by buyers and sellers, as by pricing formulas taking into account the price of the underlying stock, volatilty and time value. If stop orders were triggered by where the option actually had a trade going off they would offer very little protection in many cases. Many option contracts have only one or two trades going off per day, but the underlying stock and the options bid or ask may move 2 or three points. This is why most brokerage accounts price the value of the option positions in an account based on where the bid is... if you are long the contracts and not the last trade.
See, Ya can learn something new every day. It's rare that I use stop loss orders on an option position because of the thin volume, but now I'll NEVER use mechanical stop loss orders for options. Thanks for that info and to all the other replies as well.