Member E-mail Question:
Hi Chris,
Thanks for your post on Options, I was kinda wanting more info on Options from MSW as that’s all I trade nowadays. I had a quick question.
I mostly do spreads when I trade options, though I do straight calls as well. But I was wondering, do you use the same stop loss techniques with Options that you do with stocks? And if so, what percentage do you set the stop at? It’s a little tricky to set stop losses on Spreads but I wanted to protect the gains in my calls and since options move in large percentages, I was wondering what a good percentage would be good to use for a physical trailing stop loss on a straight Call?
Thanks!
-MSW Member
My Answer:
Thank you for enjoying the options post. As you may have heard me say in the past, I am not an options expert and I have not sustained profitable options trades over several years as I am still learning and looking for a system that works for me. This system may be the $60-$100 run.
I do not use the same stop loss techniques that I use for regular stock purchases. I give my options more room to run. If an option I own starts to fall rapidly, I sell and I have an automatic “no questions asked” sell rule if the option premium drops by half. As the option starts to show a profit, I will look to the charts for a support area for the actual price and determine what level I will use as a stop loss for the option.
Because my money is leveraged and I am not risking as many dollars on an options trade, I widen my stop loss. If you are using short term options strategies, I think stop loss protection is not very helpful due to the nature of the risk and volatility of the trade.
I can’t go into detail with my methods because they aren’t proven to this point. I have made money and I have lost money using options. Until I can consistently make money every year using options, I don’t feel comfortable teaching any methods but I do hope this helps a bit.
Chris
Hi Chris,
I have just entered a position
Sell to open —-> 1 contract —> FJJWT (FXI Nov 20 Put) —-> at premium of $2.50
Therefore I am short a put ITM option.
Am I right to state that my maximum loss for this trade is (20 price per share * 100 shares ) = $2000 – $250 ( premium I have just received).
The maximum loss for each contract is $1750.
The reason I entered into this position because I am willing to buy this stock for $20 and will hold to it if this option is exercised by the put buyer.
In all my past option experience, I am always long the call and put. I have never short a call or put. This is my first experience.
Can you please advise if I understated my risk for this trade? Thanks.
Since this comment hasn’t been answered and someone else may be interested, BPART has no maximum loss as a result of this trade. In fact, he has a profit of $250, and may or may not end up having the stock put to him at $20, an outlay on his part of $2000 if his sold put is exercised. So he will either have $250 and no stock or $250 in cash plus he will own stock for which he will have to pay $2000. So no loss.
He does, however, have a risk (not a loss). The risk is that the stock for which he paid $20 may fall in price, technically to zero. It will certainly be worth less than the $20 that he will have to pay for it if his sold put is exercised against him. However much it is below $20 will be compensated a little by the $250 cash that he received.
It’s up to him whether he takes a loss by selling it at a lower price, or holds it for a return to a price above $20, or perhaps sells calls against the stock to gain some more income.