Hi All - Does anyone have any input on placing a stop loss when it comes to options? For example, placing a stop loss on an option on a simple long call or put. NOT on a multi-leg option strategy. Does anyone recommend watching the UNDERLYING chart and placing an imaginary stop loss on the underlying. After that comparing what that underlying stop loss would be equivalent to the price of the option? Thanks in advance.
Directional conviction is ultimately and only solely your call. -- I'm not sure what kind of sure fire, magical answer you're looking for or expecting to receive. But yeah, with options you basically watch and monitor its underlying movement. -- like a hawk, The options reward/risk is volcanic ash spewing out...and the stock is below the ground, the magma and plates and cracks. I'm not sure that's a good analogy though. Make Trading Great Again 2018...High-Five`
Thanks Lawrence. yeah definitely know there is no magical answer for where to position the stop loss, but I agree watching and monitoring the underlying is the best. Not sure what trading platform you use, but i'm Using Thinkorswim. Do you use the tool on your platform to compare the option price and the expected stock price?
You have it slightly inverted, the stock price reflects the option price -- more or less. You're asking for a linear answer for a relatively complex situation. You have to understand how options and its underlying constantly dance and stretch with each other within the complex, dynamic greater picture. Without knowing your exact specific situation...it's hard to give any advice that's remotely useful and actionable. Instrument/ticker, timeframe, targets, rationality/logic, -- for starters -- it's so easy to be flawed, somewhere along the chain of events,
IMO, never ever, ever use stop or stop limit orders with options. You can get very bad executions on the open, close and during times of stress or system issues at the exchanges. Never ever! This is coming from an X-Market Maker. Not even in liquid options with tight spreads.
Thanks Robert! If I day trade options with no stop loss, i'm assuming I have to continuously watch the underlying and option price and keep an eye on it so that if it was to move against me, I manually do a sell order.
In your experience, can one play the long game with options? Not even in those situations use a stop order to protect position?
Yes. I think that ATM or just ITM calls or puts as a stock replacement can work well. I would stick with liquid options and avoid those with no paper and wide spreads. I would avoid way OTM options for a buy and hold. Nothing hurts more that the stock going up and your calls going down.