using stops with options
- Thread starter fusiforme
- Start date
Using stop orders in options is not a great idea. There are a few reasons the can create very wide options markets for short periods. During times of stress in the system, like the flash crash, system problems with an exchange, etc., even liquid markets can be wide. You can end up with very bad executions. You should monitor your P & L, set a stop loss associated with you P & L, and work out of a position manually.
1245
I never had used them with options, then took a few losses that could have been avoided so I decided to try using them. Idk if it was OptionsHouse or just the market in general but I got terrible fills. I was trading WAY too big for my account size, and those several extra cents gave my account a beating. 100 contracts filling a few cents lower than you planned can make for a bad day.
I would say it just depends on your strategy on if they would be a good idea for you or not. If you aren't going to be in front of the computer much it might still be a good idea though.
I would say it just depends on your strategy on if they would be a good idea for you or not. If you aren't going to be in front of the computer much it might still be a good idea though.
I have to ask... are you buying contracts to go long? or short? cus, (I think) that's a terrible strategy. (at least for my risk tolerances- so i guess I should keep my month shut)
As far as stops, I've never liked them. I think its a "control" thing for me. I prefer to set an alert, then go in manually to do whats needed.
As far as stops, I've never liked them. I think its a "control" thing for me. I prefer to set an alert, then go in manually to do whats needed.
One of the best stop loss systems, is to not initiate trades with strikes, until there is both a technical and fundamental reason to select that strike, for the trade you are considering.
If you engage in high probability trades to begin with, on the front end, you will have less to worry about on the back end.... if/when things go wrong.
However, if you prefer low probability trades, for their higher profit potential, you should have a discipline to minimize your potential loss.
I would suggest you keep an eye on knowing your stocks earnings release dates, if you are engaging in low probability trades.
Perhaps avoid trades whose contract runs through an earnings release.
What type strategy(s) are you considering???
If you engage in high probability trades to begin with, on the front end, you will have less to worry about on the back end.... if/when things go wrong.
However, if you prefer low probability trades, for their higher profit potential, you should have a discipline to minimize your potential loss.
I would suggest you keep an eye on knowing your stocks earnings release dates, if you are engaging in low probability trades.
Perhaps avoid trades whose contract runs through an earnings release.
What type strategy(s) are you considering???
Thanks for your replies.
I don't have a definite strategy yet; I am just getting started with options. I read a few books and wanted to give it a try myself. I decided how much I was willing to lose if things went wrong, and using a small portion of my available cash I initiated some positions, using a graphing calculator to get an idea of reward/risk.
Right now what I can do is limited because my current broker (Scottrade) does not allow short options trades, so I can only trade long calls and puts.
Anyway,after a handful of trades, I can already see that opening single long options trades is very risky, and not something I wan't to continue to do.
Right now I am at a loss, but I still have a few open positions, including one profitable LEAPs position, so I'm not yet sure how this experiment will end. At this point I would be glad enough just to break even and consider it a lesson learned.
It is too hard to predict what the market will do. Ironically, if, instead of betting on one direction, I had simply done straddles on all my trades, I would now have quite a profit, based on the price fall of just one underlying stock!
I don't plan to keep trading options until I can learn some strategies to minimize risk. Maybe I also need to change my broker so I have more flexibility?
I don't have a definite strategy yet; I am just getting started with options. I read a few books and wanted to give it a try myself. I decided how much I was willing to lose if things went wrong, and using a small portion of my available cash I initiated some positions, using a graphing calculator to get an idea of reward/risk.
Right now what I can do is limited because my current broker (Scottrade) does not allow short options trades, so I can only trade long calls and puts.
Anyway,after a handful of trades, I can already see that opening single long options trades is very risky, and not something I wan't to continue to do.
Right now I am at a loss, but I still have a few open positions, including one profitable LEAPs position, so I'm not yet sure how this experiment will end. At this point I would be glad enough just to break even and consider it a lesson learned.
It is too hard to predict what the market will do. Ironically, if, instead of betting on one direction, I had simply done straddles on all my trades, I would now have quite a profit, based on the price fall of just one underlying stock!
I don't plan to keep trading options until I can learn some strategies to minimize risk. Maybe I also need to change my broker so I have more flexibility?
If your broker does not allow you to short options, such as selling puts, you can still do the "equivalent" of selling a put by initiaing a "buy/write" strategy.
(That being.... simultaneously buying a stock and selling a covered call.)
Thus, just like selling a put, you still get to select your strike, your % otm, your credit, ect.....
And the order will NOT be filled unless all the criteria you desire are met.
That being, strike, credit, date....
However, since this will be a buy/write and not a put, you will place the order as a debit instead of a credit.
You will need your broker to go through the set up with you a couple of times, to be sure you are doing it correctly.
But once you get the hang of setting up the oder, you will realize the end result is the equivalent of selling a put.
And the nice thing is, you will be given permission to initiate buy/write trades with no problem.
If the idea interests you, feel free to ask questions about it here.
(That being.... simultaneously buying a stock and selling a covered call.)
Thus, just like selling a put, you still get to select your strike, your % otm, your credit, ect.....
And the order will NOT be filled unless all the criteria you desire are met.
That being, strike, credit, date....
However, since this will be a buy/write and not a put, you will place the order as a debit instead of a credit.
You will need your broker to go through the set up with you a couple of times, to be sure you are doing it correctly.
But once you get the hang of setting up the oder, you will realize the end result is the equivalent of selling a put.
And the nice thing is, you will be given permission to initiate buy/write trades with no problem.
If the idea interests you, feel free to ask questions about it here.
Hi Putmaster. Yes, I've looked into writing covered calls against stock but decided my stock positions are too small to make the possible income it would generate worthwhile and since they are longterm holdings I don't know if I want to take the risk of having them called away and having to pay the higher short term tax rate. I think I could benefit more from being able to write covered calls against some of my existing options contracts, which unfortunately Scottrade does not allow (not sure why, since the contacts are convertible into stock). It seems like this is one way to reduce risk and generate income from an options position, but I can't take advantage of it right now.
Scottrade does not allow you to trade spreads? Open an account with IB.