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