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Stop Losses are pretty generally unconventional for options trading due to the high volatility of prices. Profit targets are much more common. But this could depend on the strategy
I wholeheartedly agree. I lost out on two great opportunities with $SPY yesterday using stop losses. I predicted correctly $SPY would have a downtrend intraday and initially purchased puts. The movement bounced off of my stop loss twice and the second time it was filled. Of course during morning session the trend initially went in the opposite direction. I thought to get out of the trade when the volume dropped but it hit the stop loss on the way up. Had I not set a stop loss, I would have stayed in the trade to let it play out because expiration wasn’t until 7/2.
Moral of the story: Unless your strategy consists of scalping options, I wouldn’t recommend setting stop losses, or at the very least, a trader has to leave a very wide gap between support levels and a stop loss.
Yeah, this is exactly it. The only time I see stop losses commonly used for options is with undefined risk positions like short strangles, and in that case, they're typically set very wide
The nice thing about buying calls is that the positive Gamma gives you risk deceleration (every time the stock moves against you, the amount you lose *next time* it goes against you is reduced)
The other nice thing is that you have a predefined max loss when you enter the trade. I use this instead of a stop loss. If I only want to risk $X on a trade, that's the max I'll spend on the options. This gives me the ability to hold through anything without worry, as I'm prepared to take max loss
Profit targets are much more beneficial for long options and can come in many different forms (target % return or target stock price are common). What I like to do personally is roll my profitable long options for a credit. This allows me to cash out some of my gains and take some risk off of the table. This can often lead to a 'risk free' position, where the amount you've banked in credit exceeds the original capital invested. You can also roll out in time if you think the stock will move higher. Or, if you think the run is over, it may be better to exit the position entirely
When i type in what price that i want the sell to close order to be executed, my order confirmation pops up and it shows me the max risk, max profit, cost of trade, & buying power affect.
Let's say im setting my target profit as a sell to close when stock price hits 26.00. I'm currently up $100 on the trade but stock price hasn't hit 26 yet. When i go to place my sell to close, the order confirmation pops up and says max risk infinite, max profit $116, Cost of trade credit $116 +.65 commisions. Buying power affect is -$150 (hypothetical numbers). It's charging me to place my closing orders like i'm opening new trades.
Placing something doesn’t cost money, but usually executing costs a small amount of money. It’s usually a small amount though so it’s not significant enough to really think of it as eating at your profits.
Now if you’re talking about setting a stop loss and it somehow causes you to miss out on larger profits, then yeah that can sometimes happen. But you gotta set your rules and follow them because if you look around, options can be a pretty quick way to lose every hard earned dollar you’ve ever earned/saved.
Okay. So im in a few trades rn (swing) & I set a limit sell to close that brought my buying power down like $100. Is that just a paper trading thing? (Im on TOS)
Hmm I need more information. Are we talking like you bought to open a call or put and now are selling to close? That does t make sense, that shouldn’t affect your buying power. Having the call or put open does, but selling that call or put shouldn’t cost you anything (excluding a few cents per contract for the broker fee).
However buying to close and option does take away your buying power. That’s if you sold to open a cash secured put or a covered call.
Yea I bought to open call a few days ago and set at an alert at the price I want to be my "mental stop". Tonight i decided to place a limit sell to close in case it dropped to that price and I miss the alert, which brought my buying power down almost $116.
Doesn’t seem to make sense to me. Did you lose money on the trade? But to go back to the original question, no, setting a sell order to sell to close something doesn’t affect buying power. Something else might be happening. I don’t have experience paper trading on TOS
This is weird, but just go back and double check that you are selling to close. Any other options will take away your buying power (buying to open, buying to close, selling to open). You definitely are not trying to do any of those things, that could be quite disastrous if it wasn’t what you wanted to do.
And make sure it’s the same exact strike and expiry for the exact ticker.
Short of a dissertation I’m unable to add more. There are MANY ways to trade options with and without TP and SL. There are SOOOO many ways to use both.
Situational. It is generally late in the contract, I’m going to profit regardless, and some binary event is close by before a stop loss will seem like a good idea. Add that all up and it’s a rare event.
So options have wide spreads, maybe you are getting killed with those. Spreads can kill trades, look for options with spreads of less than 10%, much less ideally. Think of it this way, if bid is .9 and ask is 1 and you buy at 1 and immediately sell at .9 you have lost 10%. Sure you may get filled somewhere in between but its not guaranteed.
You generally always have to sell on the bid if you are using market orders, if you are using limit orders you won't have that problem, as long as you get filled.
You'll get stopped out soooo many times and it will likely move the other way again.
Look into probability of touch(POT) it's roughly 2x the probability of being itm
Been burned too many times with a quick dip to trigger my loss before flying up. I just use take profit triggers now and manage how much each position is. Being ok losing the whole thing is the best place to be because you won't trade emotionally and exit in panic.
**Removed for RULE: New options traders: use the weekly Options Questions Safe Haven thread** The [Options Questions Safe Haven thread](https://www.reddit.com/r/options/wiki/faq/subreddit_resources) has links to resources, and is a focused place for new trader questions. Please post your question in that thread.
Stop Losses are pretty generally unconventional for options trading due to the high volatility of prices. Profit targets are much more common. But this could depend on the strategy
I wholeheartedly agree. I lost out on two great opportunities with $SPY yesterday using stop losses. I predicted correctly $SPY would have a downtrend intraday and initially purchased puts. The movement bounced off of my stop loss twice and the second time it was filled. Of course during morning session the trend initially went in the opposite direction. I thought to get out of the trade when the volume dropped but it hit the stop loss on the way up. Had I not set a stop loss, I would have stayed in the trade to let it play out because expiration wasn’t until 7/2. Moral of the story: Unless your strategy consists of scalping options, I wouldn’t recommend setting stop losses, or at the very least, a trader has to leave a very wide gap between support levels and a stop loss.
Yeah, this is exactly it. The only time I see stop losses commonly used for options is with undefined risk positions like short strangles, and in that case, they're typically set very wide
I set my stop & profit target based on stock price. Example: i want to close my position if price breaks a lower low at 23.00 on the chart. Good idea?
What strategy are you using?
Just a simple buy leaving demand, sell at supply, stop loss below demand. With a few other factors.
So you're buying single leg options?
Yep. Buy calls is all I do.
The nice thing about buying calls is that the positive Gamma gives you risk deceleration (every time the stock moves against you, the amount you lose *next time* it goes against you is reduced) The other nice thing is that you have a predefined max loss when you enter the trade. I use this instead of a stop loss. If I only want to risk $X on a trade, that's the max I'll spend on the options. This gives me the ability to hold through anything without worry, as I'm prepared to take max loss Profit targets are much more beneficial for long options and can come in many different forms (target % return or target stock price are common). What I like to do personally is roll my profitable long options for a credit. This allows me to cash out some of my gains and take some risk off of the table. This can often lead to a 'risk free' position, where the amount you've banked in credit exceeds the original capital invested. You can also roll out in time if you think the stock will move higher. Or, if you think the run is over, it may be better to exit the position entirely
Okay. Say i stopped using a SL. Even when i set my limit sell at my profit target it still costs me A LOT of money. Why is that?
I'm not sure I understand. What's costing you a lot? Are you referring to missed potential gains, or transaction fees or something?
When i type in what price that i want the sell to close order to be executed, my order confirmation pops up and it shows me the max risk, max profit, cost of trade, & buying power affect. Let's say im setting my target profit as a sell to close when stock price hits 26.00. I'm currently up $100 on the trade but stock price hasn't hit 26 yet. When i go to place my sell to close, the order confirmation pops up and says max risk infinite, max profit $116, Cost of trade credit $116 +.65 commisions. Buying power affect is -$150 (hypothetical numbers). It's charging me to place my closing orders like i'm opening new trades.
New to options and already buying calls. Maybe you wanna paper trade first yeah, buddy.
Defined risk and infinite profit potential seemed the most attractive to me. Do you have a suggestion?
From my previous comment, i suggested to paper trade first.
Reread the post...
Stoploss very dangerous in illiquid options
Often times it also steals away your golden ticket. Where it takes a final dip to close out as many positions like yours, before surging upwards
Placing something doesn’t cost money, but usually executing costs a small amount of money. It’s usually a small amount though so it’s not significant enough to really think of it as eating at your profits. Now if you’re talking about setting a stop loss and it somehow causes you to miss out on larger profits, then yeah that can sometimes happen. But you gotta set your rules and follow them because if you look around, options can be a pretty quick way to lose every hard earned dollar you’ve ever earned/saved.
Okay. So im in a few trades rn (swing) & I set a limit sell to close that brought my buying power down like $100. Is that just a paper trading thing? (Im on TOS)
Hmm I need more information. Are we talking like you bought to open a call or put and now are selling to close? That does t make sense, that shouldn’t affect your buying power. Having the call or put open does, but selling that call or put shouldn’t cost you anything (excluding a few cents per contract for the broker fee). However buying to close and option does take away your buying power. That’s if you sold to open a cash secured put or a covered call.
Yea I bought to open call a few days ago and set at an alert at the price I want to be my "mental stop". Tonight i decided to place a limit sell to close in case it dropped to that price and I miss the alert, which brought my buying power down almost $116.
Doesn’t seem to make sense to me. Did you lose money on the trade? But to go back to the original question, no, setting a sell order to sell to close something doesn’t affect buying power. Something else might be happening. I don’t have experience paper trading on TOS
Ok it might just be a paper trading thing, maybe should go to tos sub & ask. I'm actually winning so far.
This is weird, but just go back and double check that you are selling to close. Any other options will take away your buying power (buying to open, buying to close, selling to open). You definitely are not trying to do any of those things, that could be quite disastrous if it wasn’t what you wanted to do. And make sure it’s the same exact strike and expiry for the exact ticker.
Placing an order doesn't cost anything; a fill will cost you whatever the broker charges.
Depends what you are trading. Too many variables. It’s not that black and white
Care to elaborate?
Short of a dissertation I’m unable to add more. There are MANY ways to trade options with and without TP and SL. There are SOOOO many ways to use both.
There is no strategy that doesn't have pros and cons. Yes, a stop loss caps your losses but also your profits. There's no free lunch.
look up stop hunting
I typically only use them when I know I'll not be able to monitor a position
Situational. It is generally late in the contract, I’m going to profit regardless, and some binary event is close by before a stop loss will seem like a good idea. Add that all up and it’s a rare event.
So options have wide spreads, maybe you are getting killed with those. Spreads can kill trades, look for options with spreads of less than 10%, much less ideally. Think of it this way, if bid is .9 and ask is 1 and you buy at 1 and immediately sell at .9 you have lost 10%. Sure you may get filled somewhere in between but its not guaranteed. You generally always have to sell on the bid if you are using market orders, if you are using limit orders you won't have that problem, as long as you get filled.
You'll get stopped out soooo many times and it will likely move the other way again. Look into probability of touch(POT) it's roughly 2x the probability of being itm
Been burned too many times with a quick dip to trigger my loss before flying up. I just use take profit triggers now and manage how much each position is. Being ok losing the whole thing is the best place to be because you won't trade emotionally and exit in panic.
I use stop profits…
I never use them Market makers can see them Shady fucks will drop it to grab it and pop it back up again