stops on options - exit

[peppermint]

what do you find the best way to exit a position that is going against you, assuming that you are not in front of a monitor all day. for example (swing trade), a simple position of march 50 calls on msft (current price of 48.30), purchase price of 1.70. suppose in 4 days msft is down to 46.75 which is where i would exit the stock, the march 50 calls should be at 1.00. would you enter a stop when initiating the position? thanks.

 

[atorchio]

I wouldn't recommend stops on options: unless it's a very liquid issue, you might get a fill price that is much lower than your stop.

Remember that even if the stock doesn't gap, the option might do so if it doesn't trade frequently.

I have read that some brokers allow you to link an options order to a stop on the underlying. That is, once MSFT reaches your target the option is sold at market.

alberto

 

[deepitm]

I would not recommend stops on options. A wide bid/ask spread will cause pain on a stop. If you had a stop at 1.20 and the current quote is 1.00 x 1.20 and a transaction takes place at 1.20, you will be taken out at 1.00. You could put a stop limit order in place. In general, if I have a large option position I make sure that I can monitor it throughout the day.