Stop Loss Triggered by Delta

Discussion in 'Options' started by dcwriter2, May 15, 2019 at 10:26 AM.

  1. 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.
     
  2. Robert Morse

    Robert Morse Sponsor

    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.
     
  3. ironchef

    ironchef

    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.
     
  4. Robert Morse

    Robert Morse Sponsor

    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.
     
  5. ironchef

    ironchef

    Not a problem, just want to make sure @dcwriter2 do not make the same mistake I did.
     
  6. Gotcha.
     
  7. iprome

    iprome

    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?
     
  8. Buy1Sell2

    Buy1Sell2

    Only if you don't mind owning the underlying if pricing drops back below 55.
     
  9. iprome

    iprome

    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->...)