What is your stop loss strategy?

Discussion in 'Options' started by panlee, Apr 19, 2004.

  1. panlee


    New to options and would like to learn what others are using for their stop loss. Do you based on percentage of opton price or use the price of underlying. Thanks
  2. I use the options price because that incorporates the level of the underlying and its IV (covering short gamma and vega).
  3. I tend to use an absolute dollar stop limit, which is based upon a percentage of my trading capital (1%). Thus, my stops occur as a result changes to option price.

  4. hjcolvin


    In trying to develop a good strategy I have tried both, but prefer the dollar amount.
  5. damir00

    damir00 Guest

    what's a stop loss?
  6. A stop loss is an order to sell or buy that is automatically executed when your security reaches a particular price that indicates you are on the losing side. It keeps you from losing too much money.

    I am experimenting with this. Currently I try to do trades where I can place a fairly tight stop in the direction opposite where I think the option will go, obviously, but with the bid/asked gap in the thin option markets, and the slippage, you are worse off stopping an option trade than you are a stock trade.

    I usually base the stop on the underlying as this is what I look at to decide on the trade.

    The stop will be based upon what I perceive the channel to be, and often the moving averages (10, 50 and 100 periods). Volatility has a lot to do with it too, as an option on something like RIMM is going to have to have wider stops than on Microsoft, or you will be whipsawed too often.

    Today I had a bad day and got stopped on all my trades. I was bearish when the market in the options I follow became bullish. I lost 3.5% of my trading capital today and wiped out gains for the previous periods.

    My stops usually risk no more than about 1% to 1.5% of capital. My absolute limit on any trade is 2% of capital but if a stop needs to be there, I shouldn't be in that trade.

    I usually do stop losses that turn into market orders as I want to get out promptly when a stop is executed and I am not going to be sitting at my computer. Some people do stop/limit orders but I think that is risky. A limit order is good entering a trade but not getting out in a stop situation, at least that's my thinking today. I'd like to know your opinion about this!

    I always do stop orders, always, and I NEVER move them. I trade with the stop figured out in advance. I may do a trailing stop as the trade begins working in my favor, but I never move the original stop. This is important to my disciplined feeling that I need in order to keep trading.