Stop Loss on Options

[contango321]

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.

Underlying movement is not the only thing that changes option prices. Couldn’t hurt though.

 

[contango321]

2 good ones are volatility and theta decay.

 

[sjain100]

Great point: Underlying is important, however, I should take into account Volatility and Theta decay when it comes to the option price changing. Definitely these 2 are also big ones and can't ignore those when it comes to option price.

 

[PedroWheeler]

Hi. It is difficult to make money without making stops, but the detail is in knowing when to do it, you must have a tool that helps you not to fall to the bottom of the losses.

 

[sjain100]

Thanks Pedro - yes risk management is definitely important to make money, but slightly difficult to use a stop on an option and not recommended. In that case, any specific "Tool" you would be referring too to reduce your loss??

 

[R123]

Is this what you are trying to say?

Yes, it is a guide to check the option, not an exact exit, because volatility and time decay ( theta ) also affect options value. But it alerts you to monitor your possible exit versus an untimely Stop out.

 

[sjain100]

Yes good point R123. Time decay and volatility also can change options value.

 

[Buy1Sell2]

Hi All -

Does anyone have any input on placing a stop loss when it comes to options? For example, placing a stop loss on an option on a simple long call or put. NOT on a multi-leg option strategy.

Does anyone recommend watching the UNDERLYING chart and placing an imaginary stop loss on the underlying. After that comparing what that underlying stop loss would be equivalent to the price of the option?

Thanks in advance.

I thought being long options WAS a stop loss. Isn't that the idea?

 

[Pekelo]

I thought being long options WAS a stop loss. Isn't that the idea?

You still can sell it at 1/3 or half loss...

 

[ironchef]

I thought being long options WAS a stop loss. Isn't that the idea?

But OP is day trading options.