Reasons not to use conditional orders based upon underlying?

goofy · Oct 13, 2019

The system I have for trading involves using hard stops when a divergence is formed. This is best done utilizing the underlying price of the asset- which gets very confusing given the liquidity issues in options. However, to my knowledge, the higher liquidity markets such as SPY, QQQ, would have no issue using hard underlying market stops.

For example, say I have reason to believe we are about to reverse off a bottom on QQQ. I believe we will bounce in the coming days, so I buy a call expiring in 3 days at $191. The price is $188, and I want to market exit this trade if the price crosses below $187.39.

I set a take profit conditional order to market close my position if we cross $190.

I set a conditional order to market close my position in we cross below $187.39.

Does this sound reasonable? Would this sort of underlying price utilizing strategy work for both short term and longer term trades? I.e. 24-48 hours, 2 month settlements.

I have been trading charts for years but have a minimal grasp of option price in relation to underlying price and settlement date. To an extent I am trusting that the option price is 'appropriate' when it hits my underlying price target. Is there any reason not to use the aforementioned strategy?

Thanks.

stepandfetchit · Oct 13, 2019

While what you state may be adequate for your trades, some of us are uncomfortable with market orders on options. Have you considered using limit price offset from the MARK which is present at the instant your underlying trade signal occurs? (the offset is how much you are willing to "cave" off the mark at that future specific point in time)-- You can setup these type of conditional orders in TOS.

TommyR · Oct 13, 2019

applications in options (simple exotic options and co relation) are far more complicated though than other global systems. i would hestitate to speculate on the limitations at this stage.

TommyR · Oct 13, 2019

dont use up all your coins tho

goofy · Oct 13, 2019

stepandfetchit said:
While what you state may be adequate for your trades, some of us are uncomfortable with market orders on options. Have you considered using limit price offset from the MARK which is present at the instant your underlying trade signal occurs? (the offset is how much you are willing to "cave" off the mark at that future specific point in time)-- You can setup these type of conditional orders in TOS.

I see. So you are saying that I could have it immediately place a limit order to close(or open) an option if the price hits my underlying target. The limit order will then be placed immediately with the spread that I input off the mark price? So it would prevent any sort of massive slippage situation?

stepandfetchit · Oct 13, 2019

Yes! however, it will be a limit order, so is possible the market can run away from you. I have used it successfully for SPX verticals with a 25 cent offset from the Mark (trigger based on SPX spot price), and have not been bit yet (but "knock on wood")

goofy · Oct 13, 2019

stepandfetchit said:
Yes! however, it will be a limit order, so is possible the market can run away from you. I have used it successfully for SPX verticals with a 25 cent offset from the Mark (trigger based on SPX spot price), and have not been bit yet (but "knock on wood")

Thank you for the suggestion. This seems especially important for lower liquidity options where you want a good fill but don't want to chase a 10% spread. I will look into this. My funds clear for my ToS account tomorrow. Unfortunately, I find the platform a bit confusing but the advanced order options give me no other choice. Tastyworks is very clean but they have no advanced order options.

stepandfetchit · Oct 13, 2019

goofy said:
Thank you for the suggestion. This seems especially important for lower liquidity options where you want a good fill but don't want to chase a 10% spread. I will look into this. My funds clear for my ToS account tomorrow. Unfortunately, I find the platform a bit confusing but the advanced order options give me no other choice. Tastyworks is very clean but they have no advanced order options.

Agree that TOS is a very "busy" tool, and can be overwhelming. A nice feature is you can "test" with the TOS "PaperMoney" (simulated trading) interface, to work out details such as these more complex conditional orders before using in the actual trading platform! {ie... Test out/validate the syntax with no risk!} -- you should be able to request a "walk-thru" of the highlights of the platform -- they also have a number of tutorials avail.

murray t turtle · Oct 13, 2019

goofy said:
The system I have for trading involves using hard stops when a divergence is formed. This is best done utilizing the underlying price of the asset- which gets very confusing given the liquidity issues in options. However, to my knowledge, the higher liquidity markets such as SPY, QQQ, would have no issue using hard underlying market stops.

For example, say I have reason to believe we are about to reverse off a bottom on QQQ. I believe we will bounce in the coming days, so I buy a call expiring in 3 days at $191. The price is $188, and I want to market exit this trade if the price crosses below $187.39.

I set a take profit conditional order to market close my position if we cross $190.

I set a conditional order to market close my position in we cross below $187.39.

Does this sound reasonable? Would this sort of underlying price utilizing strategy work for both short term and longer term trades? I.e. 24-48 hours, 2 month settlements.

I have been trading charts for years but have a minimal grasp of option price in relation to underlying price and settlement date. To an extent I am trusting that the option price is 'appropriate' when it hits my underlying price target. Is there any reason not to use the aforementioned strategy?

Thanks.

%% Looks mostly right; except the 3 day call expiry.
Maybe you can be one of the few to make a profit off short term trading; so keep records of the underlying QQQ/SPY profit , in addition to option losses...………………………………………...

goofy · Oct 13, 2019

murray t turtle said:
%% Looks mostly right; except the 3 day call expiry.
Maybe you can be one of the few to make a profit off short term trading; so keep records of the underlying QQQ/SPY profit , in addition to option losses...………………………………………...

I will keep a log of all trades and see if scalping is profitable. For the most part I plan on trading the Daily, 3day, and weekly charts with expiry anywhere from 4-12 weeks out.