Can one set a stop loss when selling put options or are you absolutely contractually obligated to stay with it even until you lose? For example, if you are selling put options on a stock, and things gradually don't look like they're going your way (or suddenly), can you get out before you lose the capital you put up for the buyer of the put option or not? Are there any penalties with your broker, etc.?
Stop Loss When Selling Put Options
- Thread starter Gooby
- Start date
Your positions are market to market each day and during the day for risk. After you enter a position, you have fluid gains and losses that are unrealized. Except for tax purposes, they are the same. If the position goes against you, you are losing money at that time. If your losses start to wipe out your account, you broker will issues you a margin call when your liquating equity drops below the maintenance margin amount. If you don't put in money, they will liquidate you.
- Stop losses on options are "as useless as tits on a bull".
- Buy an option and turn the trade into a Credit Spread for insurance when you open the trade.
It's called Buy to Close, if you want to exit a potentially ugly position in Options selling/writing. 
(and Sell to Open, when you start it)
(and Sell to Open, when you start it)
IMO: Yes! You CAN implement a STOP LOSS on an option. However, you need to think thru what you want to happen, and what the practical limits may be. For example: you Sell a 30DTE Naked PUT on stock X, and next day, stock X drops 50 points, your buy back of your PUT will likely cost more than you would like (especially if your trigger was to try to exit if X drops by $3). First determine what you are trying to achieve and what all the risks are, then determine best way to manage that risk. I know no one that uses stop losses on options, since the poor liquidity tends to make it a very poor choice. Extremely liquid options, such as near month near the money strikes on SPY may be the exception.
To keep things simple, some folks merely size the trade according to their risk tolerance, and then just let it go, if things don't go your way. Another idea is to use a vertical spread, or other risk managed position to control your risk, rather than a naked PUT. Get burned once with a Naked PUT on a security that goes horribly wrong quickly, and you may loose your appetite for them!
To keep things simple, some folks merely size the trade according to their risk tolerance, and then just let it go, if things don't go your way. Another idea is to use a vertical spread, or other risk managed position to control your risk, rather than a naked PUT. Get burned once with a Naked PUT on a security that goes horribly wrong quickly, and you may loose your appetite for them!
There is no assurance that you will be able to exit a position before you lose your investment, or far more than your investment. You aren't protected for overnight risk.
First of all, you may not like the price but you can always buy back the put option anytime before expiration.
Second, my brokerage allows me to "stop" and "stop limit" and it can be "good until cancel" just like stocks and ETF.
The problem is the bid ask spreads for options are wide and you will lose a lot due to the spread, e.g., if you use a buy to close stop, the price you get will be the ask and if you use a sell to close stop, it will be the bid. Also, when there is a gap up or down, you probably won't get your stop price.
I don't know if I am right, others should comment if I am not right.
Good luck.
You can set a stop-loss to close a uncovered options position unless your broker does not allow it. It will be "Buy to Close" order as was mentioned above. There are no penalties for closing the position. You are just buying back the option put contract you previously sold. You may set stop loss or you may place "Buy to close" order and close your uncovered option position at any time before expiration.
You have to bear in mind also that if you set a stop-loss, it does not your position will be filled at your specified limit price. Even on high liquid options QQQ and SPY I was filed several times $0.01-0.02 above my stop loss price. It could be biger with less liquid options.
Also, depending on your strategy and margin you can give your position a bit of breathing room by rolling it to the next month if it initially goes against you. Within index puts and high VIX I have seen instances where you can roll 1 to 1. Just be careful and do not get in endless average down.