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stops on option positions
- Thread starter osho67
- Start date
getting stopped out on options isnt the same as on stocks or futures, liquidity might be a pretty serious issue. once i saw on EOE daily options on a sudden drop in AEX, bid-ask going to 0.1 bid 2 ask, that is 1.9 wide... getting stopped then at the ask on 1000s of options would suck, when seconds afterwards it went to 1.00 - 1.05. worst part is some serious volume went through at 2.00 also....someone got screwed badly. thats what happens when you deregulate mm responsibilities to provide markets at all times.
personally i prefer to use automated stops that rely on delta neutralizing via the more liquid underlyer. then when you get back to the screen you can manually unwind the position.
personally i prefer to use automated stops that rely on delta neutralizing via the more liquid underlyer. then when you get back to the screen you can manually unwind the position.
Quote from TskTsk:
getting stopped out on options isnt the same as on stocks or futures, liquidity might be a pretty serious issue. once i saw on EOE daily options on a sudden drop in AEX, bid-ask going to 0.1 bid 2 ask, that is 1.9 wide... getting stopped then at the ask on 1000s of options would suck, when seconds afterwards it went to 1.00 - 1.05. worst part is some serious volume went through at 2.00 also....someone got screwed badly. thats what happens when you deregulate mm responsibilities to provide markets at all times.
personally i prefer to use automated stops that rely on delta neutralizing via the more liquid underlyer. then when you get back to the screen you can manually unwind the position.
Thanks for your comment. Please explain more about this automated stops if possible with some hypothetical example. This is a new concept for me. Thanks
Quote from osho67:
Thanks for your comment. Please explain more about this automated stops if possible with some hypothetical example. This is a new concept for me. Thanks
well most platforms dont support this kind of stop, so i have an excel sheet which monitors position deltas, and if the price crosses a barrier, like with a regular stop, it submits a mkt order to buy or sell underlyer in a ratio that neutralizes deltas. obviously gamma and vega exposure complicates it further. it requires a bit excel knowledge but i know it has saved my ass on some crazy spikes/drops
Quote from TskTsk:
well most platforms dont support this kind of stop, so i have an excel sheet which monitors position deltas, and if the price crosses a barrier, like with a regular stop, it submits a mkt order to buy or sell underlyer in a ratio that neutralizes deltas.
Thanks for your input data
What I would like to do is : Suppose I received a premium of $100. If the premium required to close the position goes up to $200 , my position is closed. Can I do this without any danger? In Index options the bid and ask is very wide and normally I want to put stop order at the mid price.
there is no guarantee you will get filled at midpoint in a hectic market, it might continue beyond your stop and then you are screwed...Quote from osho67:
Thanks for your input data
What I would like to do is : Suppose I received a premium of $100. If the premium required to close the position goes up to $200 , my position is closed. Can I do this without any danger? In Index options the bid and ask is very wide and normally I want to put stop order at the mid price.
i think the best solution in your case is simply use a conditional order with ask as reference price. for example, you sell an option for $1.00. the ask of that option moves to $2.00. you can now buy back at mkt for $2.00. obviously this way you are giving up some edge as the midpoint is still below $2.00, but 1. you dont have to deal with excel 2. your are guaranteed to be filled and dont risk huge losses due to your limit not being filled