TSC Options Forum: Stopping Options

Are there stop strategies for option positions? I have long put and call positions and am looking to protect myself from losses.

-- C.A.

The first and best way to protect yourself from losses is to always be right. Since that's not possible, the next best tool is to employ stop-loss orders. When trading equities this is fairly straightforward: pick the price at which you want to "get out" of a position. When the stock actually trades (not merely bid or offered) at the specified price, the order is executed. Note the important difference between a stop loss and a stop-loss limit. The latter will only be filled at that specified price. Dealing with a thinly traded issue, fast market or a gap situation may result in the stock trading through the limit price, leaving your stop loss unfilled.

This brings us to the first obstacle in using stop prices for options. Most options markets are much less liquid and have wider spreads than the trading in underlying shares. This makes it difficult to set a stop-loss price that will result in what you deem a "fair" execution price. It's important to understand the distinction between what is designated an acceptable loss and what is actually delivered. ...