Stop Loss For Options?

[poppinoptions]

I was wondering how many individuals on this forum uses Stop Losses in their Options trading methodology?

I find it difficult to use Stop Loss orders due to the daily price fluctuation. As stated at discoveroptions.com, "option traders have had some difficulty using stops since option stop orders are based on the price of the option itself…a dangerous proposition due to the volatile daily ranges that option prices can experience.

Another difficulty involves determining what option price to use as a stop. If the underlying asset hits a certain price, there is no guarantee that the option prices will move accordingly. This is due to large implied volatility changes that can occur day to day."

The author goes further stating that some brokers offer "contingency orders; that is, your option order is executed when the underlying asset trades at a certain price. For example, you can have a resting stop order to buy call options if a stock ascends beyond a resistance level that you’ve identified."

I am currently using the Option House simulator which does not offer this contingency order feature.

Overall, do you have a stop loss methodology to your options trading even though it maybe difficult to implement? nline2lo

 

[Joey25]

I was wondering how many individuals on this forum uses Stop Losses in their Options trading methodology?

I find it difficult to use Stop Loss orders due to the daily price fluctuation. As stated at discoveroptions.com, "option traders have had some difficulty using stops since option stop orders are based on the price of the option itself…a dangerous proposition due to the volatile daily ranges that option prices can experience.

Another difficulty involves determining what option price to use as a stop. If the underlying asset hits a certain price, there is no guarantee that the option prices will move accordingly. This is due to large implied volatility changes that can occur day to day."

The author goes further stating that some brokers offer "contingency orders; that is, your option order is executed when the underlying asset trades at a certain price. For example, you can have a resting stop order to buy call options if a stock ascends beyond a resistance level that you’ve identified."

I am currently using the Option House simulator which does not offer this contingency order feature.

Overall, do you have a stop loss methodology to your options trading even though it maybe difficult to implement? nline2lo

Short strangles with long deep-out-of-the-money puts and calls to limit losses.

 

[daveyc]

Short strangles with long deep-out-of-the-money puts and calls to limit losses.

do you mean iron condors (covered strangles) or back ratios (much safer)?

i don't have an answer for the op q's since i am usually at my desk.

 

[toomuch]

If you are going to use a stop on an option trade, try using a conditional order attached to the stock to limit the possibility of triggering on the bid/ask spread widening on the underlying option

 

[toomuch]

However, this isn't without slippage since you will need to have it be a market order since you won't really know the exact market price when it reaches your stop. This is only a good strategy if you are trading very liquid options with small spreads.

 

[toomuch]

Short strangles with long deep-out-of-the-money puts and calls to limit losses.

That's an Iron Condor. Not a bad strategy in steady or falling volatility. terrible strategy in rising volatility.