Does anyone know how to implement this in IB? Say, I am short an OTM call with a delta of -.10 and I want to buy it back if the delta hits -0.50.
I'd say the easiest way to do this is to pick a value a little below the option strike. E.g 55 strike, use 54.75 (Just an example) and build a conditional order to cover the option if that price is touched.
On options I only use mental stops. I am no expert so could be wrong but I think when I put a stop loss on my options, I end up sell at bid. For high volume options with narrow spreads it is fine but for thinly traded, or DOTM it is a killer.
I have said this before. I would NEVER, EVER use a market order or stop order with options. I have seen very bad executions. I was a floor official on the AMEX and complaints from these were common during times of stress. I was only trying to provide a process for someone that wants to cover that way, if the option was about a 50 delta. A conditional order as I described would get close.
If OP decides to cover naked short 55C once 55 is breached, s/he essentially anticipates the price will break out from 55 and rally to say 58 60 65... If s/he anticipated this, wouldn't it be more logical to place a buy-stop order at 55 on the underlying shares, effectively turning the position into a covered call?
Yes, it all comes down to one's opinion of underlying price movements and, in particular, one's judgement on rangebound vs trending. If one would like to guard against false breakouts (e.g., a trajectory like 55->56->51->45->...), one could attach a 54-sell-stop order to this 55-buy-stop order. Of course, such 1-point stop pair is vulnerable a true breakout with some whipsaw (e.g., a trajectory like 55->54->56->60->...)
Best defense is just to watch the position and buy back the naked call and look for a different trade. When we try to add other legs to keep an initial trade from being a loser, we end up making it a loser. More decisions(trades), more chance for loss.