about stops

[txiko]

Hello this is my first post. I do trade us indexes( options) and I have this question, is it possible to use stop limits? I use them to buy but I do not know how to do it when you sell. I'm just trying to avoid a big loss. Thank you

 

[Rhody Trader]

Hello this is my first post. I do trade us indexes( options) and I have this question, is it possible to use stop limits? I use them to buy but I do not know how to do it when you sell. I'm just trying to avoid a big loss. Thank you

You can absolutely use stops to protect your position against losses. You probably would not want to use a stop limit, though. While a stop will always get executed when the trigger price is reached or exceeded, a stop limit might not if the market moves very rapidly.

 

[txiko]

Thanks Rhody, can you tell me how to use them? I really don't know what type of order to use, thanks again
Txiko

 

[Rhody Trader]

You use a stop to protect yourself against losses by placing the order in the opposite direction of your trade. If you are long, you use a sell stop with a price below the current market price. When short, you use a buy stop with a price above the current market price.

There's actually a pretty good article in the Knowledge Lab with discusses the various types of orders. You can see it here.

 

[txiko]

Thank you, very interesting article, so if I understood right, if I have a call position I will use a sell stop, will I use the same if I have a put? Sorry for the question but I'm trying to learn.

You use a stop to protect yourself against losses by placing the order in the opposite direction of your trade. If you are long, you use a sell stop with a price below the current market price. When short, you use a buy stop with a price above the current market price.

There's actually a pretty good article in the Knowledge Lab with discusses the various types of orders. You can see it here.

 

[Rhody Trader]

Thank you, very interesting article, so if I understood right, if I have a call position I will use a sell stop, will I use the same if I have a put? Sorry for the question but I'm trying to learn.

No. The stop order is based on the option, the instrument you are actually trading, not your position in the underlying. If you are long a call or a put, you use a sell stop. If you are short an option, you have a buy stop.

 

[txiko]

No. The stop order is based on the option, the instrument you are actually trading, not your position in the underlying. If you are long a call or a put, you use a sell stop. If you are short an option, you have a buy stop.

OK, let say that I have a call option that is at $5 and that I bought it at $3, since I want to protect it, what will be the order? Also, the same question if is a put. Thank you 😕

 

[Rhody Trader]

OK, let say that I have a call option that is at $5 and that I bought it at $3, since I want to protect it, what will be the order? Also, the same question if is a put. Thank you 😕

You would enter a sell stop. If you wanted to assure no worse than break-even, the stop would be at $3. To get out with a $1 profit, your stop order would be at $4. To have no worse than a $1 loss, the stop would be at $2.

 

[txiko]

You would enter a sell stop. If you wanted to assure no worse than break-even, the stop would be at $3. To get out with a $1 profit, your stop order would be at $4. To have no worse than a $1 loss, the stop would be at $2.[/QUO

Thank you, so when I put the order sell to close, I have to choose between market, limit, stop limit etc. In this case I would choose stop limit Am I correct finally? Thank you and sorry, but I'm new with stops.

 

[Rhody Trader]

Thank you, so when I put the order sell to close, I have to choose between market, limit, stop limit etc. In this case I would choose stop limit Am I correct finally? Thank you and sorry, but I'm new with stops.

You would chose a stop to protect against a decline in the price of the option, yes.