Stop Loss on Options
- Thread starter sjain100
- Start date
Three things will move the price of an option -- the underlying, volatility, and time.
Whether long or short, your trading plan needs a much more comprehensive exit than just peeking at the underlying.
You are going to get killed.
Whether long or short, your trading plan needs a much more comprehensive exit than just peeking at the underlying.
You are going to get killed.
If you're using TOS, you can set alerts to notify you when certain condition is met. It could be MID price of the options you're trading or price level where underlying is trading at.
Let's say you're long AAPL FEB 170C at 6.50
Let's assume you're willing to risk 3.00 before stopping out.
You can look to set an alert for that option's MID point @ 3.50
OR
You can find a price level where this call is trading for about 3.50 and set an alert for that price level.
Here your alert would be AAPL trading down to 164.75 or so. Keep in mind, that price level will change over time as this call option will decay.
Either way, however you get there really doesn't matter. Setting GTC stop loss orders on options is a great idea on paper, but it will get you bad fills and a ton of slippage in practice.
Let's say you're long AAPL FEB 170C at 6.50
Let's assume you're willing to risk 3.00 before stopping out.
You can look to set an alert for that option's MID point @ 3.50
OR
You can find a price level where this call is trading for about 3.50 and set an alert for that price level.
Here your alert would be AAPL trading down to 164.75 or so. Keep in mind, that price level will change over time as this call option will decay.
Either way, however you get there really doesn't matter. Setting GTC stop loss orders on options is a great idea on paper, but it will get you bad fills and a ton of slippage in practice.
Setting a set of alerts will alert you that something might need to be addressed (by some yet-to-be determined method), and would do you well in avoiding "bad fills and a ton of slippage" from GTCs constructed on a single metric.
Setting a set of alerts will alert you that something might need to be addressed (by some yet-to-be determined method), and would do you well in avoiding "bad fills and a ton of slippage" from GTCs constructed on a single metric.
Setting alerts doenst solve the 'stop loss' issue, but it does allow you to walk away from having to sit there and watch price all day
stops on spreads are always in place for our butterfly model using IB. It is liquid enough for what we are accomplishing.
Hi Guys thanks so much for your input regarding stop loss on options.
Btw great point by IgorVI - setting an alert on the underlying or option would help a lot in order to exit when needed without having to sit there and watch price all day. That was the point to not watch the screen all day yet have some sort of exit strategy in case it moved against me.
I do use alerts, but overlooked this tool to almost act as a stop loss reminder if needed.
Thanks.
Btw great point by IgorVI - setting an alert on the underlying or option would help a lot in order to exit when needed without having to sit there and watch price all day. That was the point to not watch the screen all day yet have some sort of exit strategy in case it moved against me.
I do use alerts, but overlooked this tool to almost act as a stop loss reminder if needed.
Thanks.
Do not use stops on Options. You will get stopped out.
With out getting to in depth, a sudden "large " order will go beyond "book" and catch your stray stop way away from the market . Or an unexplained change of volatility affected the price momentarily out to your stop, and then the volatility suddenly disappeared.
Your stop is the target, you will be taken out.
Good luck having your broker break the bad trade, you won't believe the excuses they will come back with from the "floor". Bottom line you will get hosed, you will not get your money back.
Better idea: why not put an alarm on the underlying, and then close the option out yourself.
With out getting to in depth, a sudden "large " order will go beyond "book" and catch your stray stop way away from the market . Or an unexplained change of volatility affected the price momentarily out to your stop, and then the volatility suddenly disappeared.
Your stop is the target, you will be taken out.
Good luck having your broker break the bad trade, you won't believe the excuses they will come back with from the "floor". Bottom line you will get hosed, you will not get your money back.
Better idea: why not put an alarm on the underlying, and then close the option out yourself.
Hello R123 - Excellent Tip. I believe you mean an alert (alarm) on the underlying and then close out the option myself. I'm assuming you mean I can put an alert on the underlying where it would almost act like an imaginary stop loss. If the price reaches this so called "imaginary stop loss on the underlying" I would close out the option?
Is this what you are trying to say?
Is this what you are trying to say?