Stop losses for options

[Kryzz]

Hi all,
just curious as to how/where people set a stop loss for option contracts. Do most people set a $ or % loss figure at which to close out their position, or a level based on the underlying equity/index option.

Cheers,
Shaun.

 

[polartw]

For straight options (just buying a call or put), I like to get out if it dosn't go my way by the end of the seccond day, I may get out on the first day if it looks like its getting smashed (~30% loss on option)

For straight spreads I like to use technical stops (eg. if i have a bullish spread and underlying price breaks a support or trendline.) basically whenever i see bearishness in a bull trade i get out and vice versa .

 

[Jeff Worboys]

Generally, I find a common mistake is to initiate the stop loss basis the option price. Generally, the option price will increase at a rapid rate when the perceived perception takes hold. Your chance of slippage is great. I would suggest in most cases using the underlying security. Sadly, most people will forget when this strategy saves them capital as aposed to the investment that would have made them money if they had have held on.

 

[emilov]

Depends on what strategy you use. If spreads are used (or any strategy that profits from time) then I won't do anything unless the stock price touches my sold leg. In that case I'll have to see my other technicals to see if its just a temporary thing (say a shooting star) or the beginning of a trend change (in which case I'll exit).

If directional strategies are used (straight put/call, synthetics) then I wanna be able to close out at a profit relatively quickly (because time hurts these a great deal). So the stock needs to move my way quickly. If that does not happen or the stock goes against me I exit quickly, usually at no less than -20%.

Example, I own calls on STO which I bought Thursday last week (see here, at the bottom). Now, Santos dropped on the next day BUT it stayed above the trend line (which I consider support) and that is why I stayed. On Monday STO will go up (because oil did). So, I won't exit this trade until the trend line is broken.