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Stop Loss on Options

  1. 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.
  2. 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` :confused:
  3. GTC order at your price.
  4. 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?
  5. 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,
  6. 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.
  7. 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.
  8. In your experience, can one play the long game with options? Not even in those situations use a stop order to protect position?
  9. 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.
  10. Never put stops on options. You will get bad fills.
  11. Just accept that the premium paid is your stop. That of course means you must play with only a fraction of your account. As for the exit, like others said, do so when you think the underlying is no more confirming your expectation. Maximum, you lose your stop (premium).
  12. Three things will move the price of an option -- the underlying, volatility, and time.

    Whether long or short, your trading plan needs a much more comprehensive exit than just peeking at the underlying.

    You are going to get killed.
  13. If you're using TOS, you can set alerts to notify you when certain condition is met. It could be MID price of the options you're trading or price level where underlying is trading at.

    Let's say you're long AAPL FEB 170C at 6.50
    Let's assume you're willing to risk 3.00 before stopping out.
    You can look to set an alert for that option's MID point @ 3.50
    You can find a price level where this call is trading for about 3.50 and set an alert for that price level.


    Here your alert would be AAPL trading down to 164.75 or so. Keep in mind, that price level will change over time as this call option will decay.

    Either way, however you get there really doesn't matter. Setting GTC stop loss orders on options is a great idea on paper, but it will get you bad fills and a ton of slippage in practice.
  14. Setting a set of alerts will alert you that something might need to be addressed (by some yet-to-be determined method), and would do you well in avoiding "bad fills and a ton of slippage" from GTCs constructed on a single metric. :)
  15. Setting alerts doenst solve the 'stop loss' issue, but it does allow you to walk away from having to sit there and watch price all day
  16. stops on spreads are always in place for our butterfly model using IB. It is liquid enough for what we are accomplishing.
  17. Hi Guys thanks so much for your input regarding stop loss on options.

    Btw great point by IgorVI - setting an alert on the underlying or option would help a lot in order to exit when needed without having to sit there and watch price all day. That was the point to not watch the screen all day yet have some sort of exit strategy in case it moved against me.

    I do use alerts, but overlooked this tool to almost act as a stop loss reminder if needed.

  18. Glad this helps.
    I use alerts to notify me to 'when' adjust my Iron Condors as well as credit spreads.

  19. Do not use stops on Options. You will get stopped out.

    With out getting to in depth, a sudden "large " order will go beyond "book" and catch your stray stop way away from the market . Or an unexplained change of volatility affected the price momentarily out to your stop, and then the volatility suddenly disappeared.

    Your stop is the target, you will be taken out.

    Good luck having your broker break the bad trade, you won't believe the excuses they will come back with from the "floor". Bottom line you will get hosed, you will not get your money back.

    Better idea: why not put an alarm on the underlying, and then close the option out yourself.
  20. Hello R123 - Excellent Tip. I believe you mean an alert (alarm) on the underlying and then close out the option myself. I'm assuming you mean I can put an alert on the underlying where it would almost act like an imaginary stop loss. If the price reaches this so called "imaginary stop loss on the underlying" I would close out the option?

    Is this what you are trying to say?
  21. Underlying movement is not the only thing that changes option prices. Couldn’t hurt though.
  22. 2 good ones are volatility and theta decay.
  23. Great point: Underlying is important, however, I should take into account Volatility and Theta decay when it comes to the option price changing. Definitely these 2 are also big ones and can't ignore those when it comes to option price.
  24. Hi. It is difficult to make money without making stops, but the detail is in knowing when to do it, you must have a tool that helps you not to fall to the bottom of the losses.
  25. Thanks Pedro - yes risk management is definitely important to make money, but slightly difficult to use a stop on an option and not recommended. In that case, any specific "Tool" you would be referring too to reduce your loss??
  26. Yes, it is a guide to check the option, not an exact exit, because volatility and time decay ( theta ) also affect options value. But it alerts you to monitor your possible exit versus an untimely Stop out.
  27. Yes good point R123. Time decay and volatility also can change options value.
  28. I thought being long options WAS a stop loss. Isn't that the idea?
  29. You still can sell it at 1/3 or half loss...
  30. But OP is day trading options.
  31. Tell us again why you want to day trade options instead of the underlying and deal with simultaneous underlying price change, volatility change and time decay....? You must be an options pro.
  32. I do understand that, but my question would be why? If you are watching the underlying, then just trade the underlying and place a stop. Why would someone want trade both sides of option spread in one day?
  33. Certainly can----
  34. Not having stops on options is ludicrous! This is my 20th year trading options and I have used stops since the beginning.
    Must meet these requirements to use stops:
    1: High Daily Volume (thousands of contracts per strike daily) options.
    2: Tight Bid/Ask Spread (.01 to .02)
    3: ATM or slightly ITM with at least 2-4 weeks left B/4 expiration.
    4: Maximum hold time of 4 days.
    5: A minimum -.40 to -.50 Stop below the entry.
    6: A profitable Sell Limit of +.40 to +.50

    Very few trade vehicles meet those requirements. The best one that does is the SPY.
    Look up my older thread called, Purely Mechanical Option Trading Part 2. You will see live calls
    using a Buy Limit, Sell Limit, & Stop combined into an IB semi-automated Bracket Order.
  35. What purpose would there be to intraday trade options?
  36. A very small group of option traders trade mathematical mechanical systems based on a math formula that gives option direction (call or put) daily.
    These systems call for pre-determined Buy Limit, Sell Limit and Stop, usually combined into a semi-automated I.B. Bracket Order. Many times the trade will either trigger the Sell Limit or trigger the Stop, ending the trade in the same day.
    I demonstrated one of these systems with live calls including the daily bracket orders on an older ET thread I had called, Purely Mechanical Option Trading Part 2.
  37. I swing trade options with similar criteria as you. But if you are mostly using the SPY why not use futures ? You are not picking up a lot of convexity with the option in this type of trade, are you ?
  38. Just use futures intraday. There seems to be no reason to trade options intraday.
  39. I agree with you if you are a mom and pop retail like me. If you are a pro trader, it is perhaps a different story since you have resources to analyze a complex strategy?

    I am eagerly waiting for OP's answer.
  40. Thank you. I am going to look into this. Currently, none of my option positions fit any of the 6 requirements.:banghead:
  41. In 20 years of trading, I have never traded futures. I feel at this age, I don't want to start something new, because I don't have time on my side anymore for the learning curve. It took many years to regularly get profitable doing what I am doing. No margins, no big risks, simply place my bracket orders daily and let the bracket do the rest. End of the month withdraw the net profit above my account base amount to supplement my income. Clean and simple.
  42. :thumbsup::thumbsup: If only we can all be like you, 20 years is a long time to be consistently profitable.

    Hats off to you sir and thank you for sharing your method.

    Question: Looks like your exit is automated but do you or can you automate your trade or have to manually enter?

  43. ------------------------------------------------------------------------------------------

    Thank you for the compliment, but I wasn't profitable in the beginning. It took several years to figure this out before the final system was programmed and complete.
    I have to manually click the transmit button on the semi-automated bracket order "after the option opens."
    Here is the reason why its not total automation: If the option opens with a severe gap down opening that is below my pre-determined Buy Limit, I then need to change the bracket parameters (Buy Limit, Sell Limit & Stop) before transmitting the order.
    Example: Lets say my original Bracket is Buy Limit=1.50 Sell Limit=1.90 Stop=1.10 and the option opens at 1.20. If I had already transmitted my bracket order manually or used total automation like I.B.'s API (Automatic Programming Interface), the Buy Limit would have filled at approximately 1.20 (+ or - a bit). With the Stop in the program set at 1.10, the possibility of a Gap Down opening dropping another -.10 is almost a certainty and the trade would have lost because because the program was set in motion pre-market.
    In this case I would adjust the bracket to: Buy Limit=1.20, Sell Limit=1.60, Stop=0.80.
    You really need to wait and see the opening price and then if a big gap down opening, adjust accordingly. It happens too often.
  44. Thank you. It is a very interesting approach. I need to think it over carefully and see if I can adjust my method to accommodate this. Certainly make trading a lot less time consuming if the exit is set automatically.