Protective Stop on a Credit Spread Order

R

rickcremer

I have a question about using a "stop-loss" order on a credit spread that I am short. I.e. how to protect the position if the market declines.

I sold a 1405/1400 SPX put credit spread a few days ago for $1.50. The theoretical price for the spread at today's close is $1.00.

I know that, using ToS' software if I right click on the spread in the Order Book screen I can create an Opposite Order which works for exiting the trade at the natural or mid price or somewhere in between. That's what I would in order to take a profit.

But what is the best way in a credit spread to place a stop-loss or similar order to limit a loss if the market declines below the short leg? I could always put in a single order to buy back the short side (the 1405 leg) but is that the best way to do it? ToS' order types demos don't touch protective stops on spreads.

Thanks in advance....
 
Here is a suggestion, although you might be better off calling the order desk yourself and ask because i'm sure this has come up many times before :

Use TOS tools to figure out what expected value of the spread would be if SPX was at 1405. Enter a limit order for the estimated costs of the spread, and add a "rule" that SPX must trade below 1405 for the trade to be live.

I don't know how you'd fair if you used a market order to cover, although I can't imagine it being pretty.
 
As the OP mentioned, estimate what the spread is gonna be worth at your exit level and then setup a conditional order by first setting up an order to buy the spread and then clicking on the blue arrow next to the "day" in the "rule" column. This would bring up a new window. In there you can select whether the order is a day order or GTC and then at the bottom in the "symbol" column type in "SPX", hit "enter", then select the "method", "trigger" and "price".
 
You really can't do stop on options.

Due to the huge spreads, it pretty much requires you to be there to put in the orders, unless you don't mind getting ripped off by paying bid or selling at ask with a spread of $1+
 
Thanks to the three of you for responding. All of you made sense and provided some excellent tools/ideas for making an exit from the spread. Much of what you suggested was reiterated by the the trading desk folks at ToS. As a part of my trading plan I have adapted the guidance you and the ToS folks have given me.

Best
 
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