Market Talk with Piranha is currently moving to its new home at chrisperruna.com. The new site is up and running but many of the posts need editing as the images and stock charts did not transfer successfully (thanks blogger). I will post all new entries to both blogs – Thank you for your patience while I make this change!

Thursday, December 08, 2005

Stock Options Stop Loss

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

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