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Tools for Defining Your Options Trades

This week, how to enter and exit trades, plus, finding the VIX.

Steve, in your newsletter and columns, you often talk about having defined parameters for establishing any position. These would include the entry point, a target price and a stop-loss level.

While I appreciate you providing specifics for trades, I'm not clear on how to enter the orders. For example, in a past position in Google (GOOG) - Get Alphabet Inc. Report, you wrote "use a close below $550 as stop for exiting the position." Can explain how this works. Thanks, Ellen

Getting in and Out

This is a good question because option trading based on stock price can be a complicated process. The reason I use the stock price to define the position's parameters is because there are many variables involved in the price of the option, such as time and implied volatility, which make it difficult to determine what the value of an option will be worth when the stock itself is at a given price.

New Option Order Tools

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If a stock moves to the target or stop-loss level in a matter of days on a news event, the value of the options will be very different than if it takes weeks or months. So, rather than suggest buying a call for $2 a contract and selling it at either $4 or $1, I'd rather use the stock price as a trigger for exiting the position.

This doesn't mean one should ignore the value of option, especially as expiration approaches you do need to make a decision as to whether simply close the position, whether its profitable or not, even if the stock has not reached the target price or stop loss level.

New Order Entry Tools

A few brokers, including large publically traded firms such as


(SCHW) - Get Charles Schwab Corporation (The) Report

to private upstarts


are now offering advanced trading orders. Their main feature is the ability for traders to automatically enter trades if certain conditions are met.

A trader can input a trade, leave his/her computer for the day, and if the conditions are met, such as stock or option price, the trade will automatically be sent to the market. While this may sound like a simple contingency that most online brokers already offer, these two firms have advanced the ball.

They have added several layers, such as one-cancels-other (OCO) to the process, meaning that if an order is not executed, then an exit is not entered. Or once this initial position is established, the other two orders, for taking profits or being stopped out for a loss, are entered.

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And once of those two orders are executed, the other is cancelled. In essence, one is entering three orders simultaneously that define the parameters of the trade. This not only allows one to keep a certainly level of discipline, but frees you from being tied to watching the market or monitoring the position all day.

Schwab now offers something called "bracket trades," which I discuss

in this video with Randy Frederick, director of derivatives for the online brokerage firm.

OptionsHouse's new tools also provides a more dynamic approach, such as being able to place orders called "trailing stops," or orders that will change with the movement of a security.

For example, every time the stock moves up a certain percentage, the stop-loss-level portion of the order might be increased by either a specific dollar amount or a comparable percentage move.

Hey, Steve, love your work. Where can I find quotes on the VIX?, Walter

The best starting point would be right at the source, that being the Chicago Board Options Exchanges website. Specifically

this page, which updates the value of the VIX every 30 minutes. To get the tickers and quotes on the VIX futures, move along to this

page. It provides not only all the specifications and educational material, but also quotes on the VIX futures.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;

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