Option writers: do you have a stop loss?

scotta65 · Jun 22, 2015

For those who regularly write options as their primary trading vehicle, are you setting stop losses? Whether they're by $ amount or technical level.

Risk management is key in this game, especially as an option writer.

I do set a stop, which is when the premium of the option doubles the price i sold it for. Anyone else?

OTM-Options · Jun 22, 2015

scotta65 said:
For those who regularly write options as their primary trading vehicle, are you setting stop losses? Whether they're by $ amount or technical level.

Risk management is key in this game, especially as an option writer.

I do set a stop, which is when the premium of the option doubles the price i sold it for. Anyone else?

Sounds good on paper ....... but impractical in reality.

The after-hour market.
Unexpected news.
Options don't move in a linear fashion. Down 50% one day, up 100% the next.

The only practical stop is the total debit or maximum loss of a credit spread. Otherwise you end up leaving lots of money on the table.

scotta65 · Jun 22, 2015

My reasoning for my stop placement (and for this thread idea) is to see if anyone else who sells options manages risk the way, maybe, a stock trader would: with a stop at a dollar loss level or a price level. I think its an underappreciated philosophy that option trades don't have to be binary.... nobody is forcing you to hold onto a losing option write just because your OTM strike hasnt been hit. You may lose more often, but your risk of blowing up is greatly reduced

OTM-Options · Jun 22, 2015

scotta65 said:
My reasoning for my stop placement (and for this thread idea) is to see if anyone else who sells options manages risk the way, maybe, a stock trader would: with a stop at a dollar loss level or a price level. I think its an underappreciated philosophy that option trades don't have to be binary.... nobody is forcing you to hold onto a losing option write just because your OTM strike hasnt been hit. You may lose more often, but your risk of blowing up is greatly reduced

Yes ...... I fully understand the idea behind your thread. And a good idea if option positions progressed like this:

Plus or minus.
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
...
...
...

You then can easily set your stop loss or profit, in your case exit at minus 100% because the next level is minus 110%. But options are not linear, they trade like this:

-40%
-20%
+10%
+50%
+100%
-200%
+20%
+150%
-120%
+10%
+50%
+130%
-20%
-70%
+80%
???
???
???

You can not arbitrary set your stop loss at double the premium you collected when the value fluctuates so much.

traderlux · Jun 22, 2015

scotta65 said:
For those who regularly write options as their primary trading vehicle, are you setting stop losses? Whether they're by $ amount or technical level.

Risk management is key in this game, especially as an option writer.

I do set a stop, which is when the premium of the option doubles the price i sold it for. Anyone else?

are you writing as a spread or cash/margin secured?
have you considered rolling time or strike?
have you considered being assigned and writing a covered call?

I don't use stops, I do cash secured and if I sell strikes far enough out I can usually close early, if it moves against me i either roll or take assignment and do a CC. I usually sell 2-4 wks out in time.

drcha · Jun 22, 2015

Agree with the above: best stop is another (long) option, or keeping your size small. Go back and look at October 16 and October 19 of 1987. The Dow opened down 9% and fell another 15% during the day. You can't stop loss your way out of that. You either need the cash when they put everything to you, or you need to be trading European style options.

Please don't try to tell me that 1987 won't happen again. No one knows that.

Chubbly · Jun 22, 2015

drcha said:
Agree with the above: best stop is another (long) option, or keeping your size small. Go back and look at October 16 and October 19 of 1987. The Dow opened down 9% and fell another 15% during the day. You can't stop loss your way out of that. You either need the cash when they put everything to you, or you need to be trading European style options.

Please don't try to tell me that 1987 won't happen again. No one knows that.

I have no doubt we will have another day like 1987.
Using a stop writing options is a good practice. Otherwise you can end up with catastrophic losses (especially with naked options) . I always have a order to buy @ Market the opposite order to zero out at loss of 1-2x max credit. Yes, I will get screwed buying at Market but it is better than a catastrophic loss. I also use a limit order to snag a profit during wild ups and downs.

minmike · Jun 23, 2015

Option markets are too wide for stops. Why not delta hedge as your stop with outrights?

i960 · Jun 23, 2015

minmike said:
Option markets are too wide for stops. Why not delta hedge as your stop with outrights?

Probably because a lot of people are selling OTM time-bombs they couldn't delta hedge if they wanted to.

drcha · Jun 24, 2015

Chubbly said:
I always have a order to buy @ Market the opposite order to zero out at loss of 1-2x max credit.

You won't get your 1-2x max credit in 1987. You will get the market price, which may be 10 times the credit you received.