Can Stop Loss Orders Be Applied in Binary Options

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Can Stop Loss Orders Be Applied in Binary Options?

Binary options trading and forex do have a lot in common. This is why many people wonder if there are stop loss orders for binary options as well. Stop loss orders is a mechanism that is in place in forex trading to help the trader avoid too much loss.

It is an order that a trader places on a particular position. If the price of a currency reaches or falls below a specified number, this triggers an automatic trade. The trader’s currency is then immediately sold to prevent them from losing any more money.

This is typically used for long positions, especially when the trader is unable to monitor the position themselves. So, can the same concept be applied to binary options trading? Let’s take a look:

Binary Options Doesn’t Offer Stop Loss Orders

The simple answer is that no, binary options doesn’t offer stop loss orders. This is not a mechanism that has been built into this particular type of trading. This is for many reasons. One of the main causes, however, is that binary options trades tend to be a lot shorter than forex ones.

On average, binary options trades last just a matter of minutes. With forex, however, these trades can last for months on end. This can make it a lot more difficult for the trader to keep an eye on the market price at all times. This is what oftentimes can make binary options seem like a riskier venture. As there is no way to curb the loss, you stand to lose your entire investment.

Is There an Alternative

This does not mean that you are completely out of choices with binary options trading. This is because there are instances when brokers give you the opportunity to minimize your loss. Now one of the concepts with stop loss is that you don’t prevent the loss of money but rather minimize it.

Similarly, with binary options, the broker will allow you to exit a trade before it expires. Due to the duration of the trades, you can tell quite quickly whether the trade is going to end in or out of the money. In the event that it appears that you are wrong about your position, you can tell the broker that you want to back out. Of course, you do have to forfeit a considerable amount of your initial investment. At the same time, it does mean that you don’t lose everything.

How You Can Use This Opportunity

Now, the first thing you will need to do is to find a broker that will allow such an early exit. This is not something that is offered by every broker. Therefore, you will need to conduct some research on the matter. However, that is not enough. You will also need to compare the rates that each broker is offering you. The more money that you can get back, the better. This will considerably add to the profits that you make from the trades that you do manage to win.

This is the slightly more complex answer to “can stop loss orders be applied in binary options”. While you may not be able to use the same mechanism as forex trading, you do have choices.

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Take-profit and Stop-loss on the IQ Option platform!

As many have already noticed IQ Option has added Forex to its collection of trading tools. The approach of this event was truly innovative and engaging, and therefore, as a consequence we are happy to introduce you a trading benefits of Take-profit and Stop-loss orders (SL/TP). Because the control of SL/TP is one of the key concepts at Forex market.

Getting profit from the deal at the right time is as important as to determine the optimal moment of its stop. Price fluctuations is an integral part of the life of the market, and what once seemed like a positive trend in one moment can totally opposite turn into a sudden decline.

Common belief says that it is always better to take profit now rather than wait and risk losing possible earnings. Remember that giving profit to grow without closing the deal prematurely is not bad, because it is the way for a part of the potential profits is formed. But in any case you should not get involved and wait until the last, because the chances to keep or lose are equal.

Traders use Take-profit and Stop-loss orders to prevent unnecessary potential financial risks. This occurs through the confining of loss and an automatic closing position, thereby ensuring the timely receipt of profit from successful deals that will help to keep the potential profit from fluctuations at the market. In other words, these features help to create a “safety net” for traders in the case of impulsive, premature and rash solutions by trading online.

In simple words, the principles of work of Take-profit and Stop-loss are the same, while their definition are different. Take-profit orders gives you the opportunity to take off money at the peak of the transaction. And the essence of Stop-loss orders lies in minimizing of the expenses of the trader. The trader can set SL/TP orders over the already existing, as well as over pending trading. But it is worth to remember, that they will be performed only at open positions and not in case of pending orders.

So, what kind of miracle Stop-loss and Take-Profit orders are? Why should a trader use it in trade?

Stop-Loss order

Stop-loss is a convenient way to minimize losses from the deal, if the price of the chosen asset is beginning to change – progressing in an unprofitable trend. In other words, this it lets trader to send this order to his Forex broker and limit its possible losses on a current open position. The position of a specific deal is automatically closed at the current market price when the price of the chosen asset reaches a current level. Thus, trader minimizes his potential losses from the ongoing trade. It is important to note that Stop-loss price does not have to be the price of the Stop-loss order execution, that is, it can also be used if price gap occures.

Stop-Loss order opening

When you open Stop-loss orders a trader it is necessary to determine the amount, which you willingly ready to risk in the implementation of each specific deal. In its turn, a special calculator at IQ Option trading platform will automatically perform all the necessary calculations for a setted amount of interest depending on the value of the initial investment. The success of the trader will consist of a timely response and ability to pre-close the transaction to not incurre the losses. Every trader develops these skills after the lapse of considerable time with the an accumulated trading experience. Top traders share the usefulness of these orders, as not just the amount of money trader is willing to “sacrifice”, but also to ensure that it is reasonably use to the conditions of the market as a whole.

3 basic techniques of determining the optimal Stop-Loss orders:

• “Percentage stop” is used to determine the position of Stop-loss orders, based on the amount of investment that a trader is willing to risk at any given moment of trading process. With all this, Stop-loss order depends on total capital and the amount of invested funds. But remember, one unwritten rule of experts, who recommend to allocate a Stop-loss order only approximately 2% (not more) of the total amount of trading capital per one transaction.

• “Graphic stop” – a method oriented for the most part on a technical analysis in contrast to the rest of the methods. As experience shows, the optimum Take-profit and Stop-loss orders allow to determine the levels of support and resistance. Specifying the point of Stop-loss beyond these levels is in itself one of the methods of how it can be done. Trader gets a good chance, when the market trades outside of these areas, as trends continue to work against you. As a result, it will be the time of collecting the remainder from the investment.

• “Volatility stop” is “desirable thing”, that noone wants to miss. As practice shows, the Volatility stop can be pretty much different for various assets. This significantly affects on the trade, because knowing what range of price movement whether stocks or commodities, trader will be able to set the optimum Stop-loss order. You should always remember that all volatile assets require a high attention to risk creating, and as a result, expectation of higher levels of Stop-loss orders.

Take-Profit order

Take-profit orders allow to close the deal with a profit, when the price of asset reaches a certain set level. The execution of this order provides to closing the deal under the rules of limit orders. Take-profit can be set only at the open position, stop order and/or pending order.

It is recommended to use technical analysis tools for Take-profit orders to determine the ideal moment for closing the deal right in front of the trend reversal. Pay your attention on Bollinger bands, Average Directional Index and/or Relative Strength Index, as all of them are best suited for controlling Stop-loss and Take-Profit orders.

(!) little note: it is recommended to use the ratio of risk-reward equal to 1:2. So, rader will be able to retain profitability constantly on a long term basis, even with an equal ratio of failed and successful transactions. But this does not mean that this ratio is the essence and the Golden rule which must be followed. You should always correct any advice according to your spesific trading strategies. In this case, look for your optimal risk-reward ratio, because none of the known rules does not work the same way for an individual asset as mmuch as for each trader.

Simply saying, the traders use SL/TP orders to correctly leave the market at the right time. Most of the traders uses Stop-Loss orders in opposed to Take-Profit orders, as they probably feel them less necessary. However, in our opinion, this can be wrong, because Take-Profit orders help to avoid many problems and allow to save money in carrying out of the deals on a winning position.

Those traders use SL/TP orders, are not obliged to continue the trade, till the asset price reaches a predetermined level. Everyone is free to close the deal under unfavorable price movements at the market. Don’t let your emotions make decisions. Give it the right, cold and objective decision. Because doing it impulsive can be often the most devastating, leading to unreasonable losses. This unwritten rule works in the case of determination of ST/TP orders.

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

Use a Daily Stop-Loss to Protect Your Trading Income

Most day traders know about limiting the risk of their trades, but capping daily losses is a practice traders could also benefit from. By capping risk on each trade and day, the trader is taking steps to make sure that no single trade or single day ruins their month, or worse yet, their account. To become a successful trader, try to think like a trader who already is successful–and who therefore relies on his trading account (capital) to make an income every month in order to live. When a trader loses a large chunk of capital it should feel similar to how most people would feel if they got fired from their job. Limiting risk, on each trade and on a daily basis, can help avoid this uncomfortable situation and feeling.

Strings of losses occur. Even following a great system, and having a keen market insight will result in a number of losers in a row at some point. That’s just the way it is. If you risk too much on each trade though, a small string losses can wipe out an account.

Only risk 1% to 2% of your capital on a single trade. This way no single trade will ruin you. See Determining Binary Options Position Size for a detailed description on how to manage trade risk in this way.

While capping the risk on your trades is important, so is capping the amount you can lose in a day.

Let’s assume you trade for a month (20 trading days), making a profit of $2000. On average you made about $100/day; some days you lost, some days you made less than $100 and other days more, but that is the average. You have a weekend off, feeling good about last month, and then proceed to lose $500 on the next trading day.

Change these numbers to suit your personal circumstance, but the point you should take home is that this daily loss is out of whack with the average daily profit.

It will take five normal days just to make back that single daily loss. This shouldn’t happen.

I recommend a floating daily stop, or a consecutive-loss-daily-stop (quite a mouthful).

A consecutive loss daily stop is when you define how many trades you are willing to lose in a row before calling it a day. If I lose three to four trades in a row, I am not in the right headspace, my strategies aren’t suited to the market or something else is doing on. In any event, I stop trading. I don’t want to waste more money than I have to on a day that isn’t showing me the type of price action I want.

A floating daily stop is a bit more complex. It is based on your average daily profit over the course of the most recent 20 to 30 trading days. If you made $2000 over 20 trading days, your average daily profit is $100. Therefore, keep your maximum daily loss near this figure–between $100 and $125.

This is a simple approach to get you started. To get more precise, take an average of only your winning days. By not including the losing days in the average, you may be making $175 on your profitable days. This is also an acceptable daily stop level.

The idea is to make sure your losing days don’t greatly exceed how much you make on profitable days.

By capping your daily loss at roughly the same amount as your average profitable day, you make sure that no single day significantly hurts you. If you follow this rule, any money you lose one day can easily be recouped on an average winning day.

Managing trade risk is important, but so is managing your daily loss. Instill a daily stop loss on yourself, so that one (or several) losing day doesn’t jeopardize your trading. If you lose three or four trades in a row, stop trading for the day. Also, specify the maximum amount of money you can lose in a day–based on your daily average profit–and then stick to it. Just like you don’t want one trade to ruin you, you don’t want one day to ruin you either.

Master Stop-Loss and Take-Profit Feature

Stop-loss and take-profit (SL/TP) management is one of the most important concepts of Forex. Deep understanding of the underlying principles and mechanics is essential to professional FX trading.

Stop-loss is an order that you send to your Forex broker to close the position automatically. Take-profit works in much the same way, letting you lock in profit when a certain price level is reached. SL/TP is, therefore, used to exit the market. Preferably, in the right way and at the right moment. Several strategies exist, making the decision process harder but also providing the trader with additional opportunities.

SL/TP customization menu can be accessed in the upper right-hand corner

Opening stop-loss orders

What is a stop-loss and why would anyone use it in trading? By opening a stop-loss order you determine the amount of money you are willing to risk in a case of each particular deal.

IQ Option trading platform calculates the said amount as a percentage of your initial investment.

Cutting off losses at the right moment is a skill all traders have to learn sooner or later should they want to reach a certain degree of success. Professional traders do believe it is wise to adjust stop-losses to market conditions, not only the amount of money you are ready to sacrifice. Taking technical analysis into consideration can also be practical. And remember, the majority of traders agree: it is vital to know when to get out of trade even before opening a position.

There are three major ways to determine optimal stop-loss points:

  1. Percentage Stop. Determine the stop-loss position based on the amount of capital you are willing to risk at each particular moment. Stop-loss in this case will heavily depend on your total capital and the amount of money invested. Remember that experts advocate allocating not more than 2% of your trading capital to a single deal.
  2. Chart Stop. This method is more technical analysis-oriented than the others. It turns out, support and resistance levels can also help us determine optimal SL/TP points. Setting stop-loss beyond support/resistance levels is one way to do it. When the market trades beyond these areas, there is a good chance the trend will continue working against you. It is time to take what’s left of your investment.
  3. Volatility Stop. Volatility is something traders don’t want to miss. It can differ dramatically from asset to asset, thus making a tremendous impact on trading results. Knowing how much a currency pair or a stock can move will help greatly in determining optimal stop-loss points. Volatile assets may require higher risk tolerance and therefore greater stop-loss levels.

Bollinger Bands is an indicator used to estimate market volatility

It might be a good idea to shape your own SL/TP system, combining different approaches. It should be based on your trading strategy and market conditions.

By using SL/TP you do not accept an obligation to wait until the predetermined price level is reached. Feel free to close a deal should the market demonstrate unfavorable price action. But at the same time do not let your emotions intervene. Have you ever noticed how devastating emotional trading can get? The same happens when you place a stop-loss order and don’t give your trading strategy enough time to validate itself.

Stop-loss is not simply the exit point, good stop-loss is set to become an “invalidation point” of your current trading idea. In other words, it should prove the chosen strategy does not work. Otherwise it may be a good idea to wait.

Opening take-profit orders

Stop-loss and take-profit work in pretty much the same way but their levels are determined differently. Stop-loss signals serve the purpose of minimizing the expenses of an unsuccessful trade, while take-profit orders provide traders with an opportunity to take the money at the peak of the deal .

Taking profit at the right time is as important as setting optimal stop-loss signals. Market always fluctuates and what seems like a positive trend can turn into a downturn in a matter of seconds. Some would say it is always better to take respectable payouts now than to wait and risk losing your potential payouts. Note that not letting your payout grow high enough and closing the deal prematurely is not good either, as it would eat up a portion of the potential payout. Waiting for too long can be equally detrimental.

The art of take-profit orders is to pick the right moment and close the deal right before the trend is about to reverse . Technical analysis tools may be of great help in determining the reversal points. You may choose between Bollinger Bands, Relative Strength Index or Average Directional Index. These indicators work best for the purposes of SL/TP management.

RSI can help determine optimal take-profit positions

Certain traders might recommend using a 1:2 risk/reward ratio . In such a case, even if the number of losses is equal to the number of successful deals you would still be generating payout in the long run. Consider finding an optimal risk/reward ratio, that would suit your personal strategy and remember there are no universal rules that would work for each asset and every trader.

Things to remember

Keep in mind that SL/TP is just yet another tool in your rich trading portfolio. Trading skills are not limited to correct usage of indicators and stop-loss/take-profit orders. Don’t let any automated system trade for you. Rather rely on it in order to get better control of your deals and emotions. It may take some time to learn the basics of SL/TP orders but when it is done, you are left with another must-have trading skill.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.


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Stop Loss

Stop Loss – Introduction

Stop loss is selling out of losing position when it is deemed to have little chance of turning around profitably or that when an options trader’s predetermined loss limit for that trade is met. Sounds really simple and straight forward, right? Simply sell when things are not looking good for your position. Fortunately or unfortunately, in options trading, there are many ways of performing this action of stopping loss. In fact, so many ways that almost all options beginners are bound to get confused on what they are and how to use them.

This tutorial shall explore in depth what stop loss means in options trading and the different stop loss methods made available by most options brokers.

What Does Stop Loss mean?

The term “Stop Loss” simply means stopping a position from losing more money. For instance, you have a bullish outook on QQQ and you buy its call options for $1.50. However, instead of rising, the price of QQQ begins to drop and the value of your call options drop to $0.50. You decide that that is as much loss as you are willing to bear for that trade and you sell the call options to salvage the remaining $0.50. That is a stop loss action.

Sounds pretty straight forward until you consider more customized actions such as setting your stop loss point based on the price action of the underlying stock instead of the options price, allowing the broker to automatically track and sell the options position only when it pulls back a certain amount from its highest price.

Options trading is truly the most versatile way to trade in the world not only due to the fact that options are the most versatile trading instruments in the world but also due to the fact that options brokers have come up with so many advanced, customized solutions for entering and exiting options trades and that includes many advanced and customized ways to stop loss.

In general, stop loss in options trading can be “Stock Price Based” or “Options Price Based” and they can either be manually or automatically executed.

The Simplest Stop Loss Method in Options Trading

As you can see from above, there are many ways of executing stop loss in options trading but if you are executing simple Long Call or Long Put options strategy, there is a way to ensure stop loss, losing only a maximum of your predetermined loss amount, right from the onset of your trade; Use only your intended stop loss amount of money for the trade! This means that if you do not wish to lose more than 1% of your portfolio on any one trade and 1% of your portfolio is $1000, you would then buy your call or put options using only $1000. When you buy options in a Long Call or Long Put options strategy, your maximum loss is limited to the amount of money you use in buying those options. This means that in the worst case scenario, the options you bought expire worthless and you lose all the money you use toward buying them, nothing more. As such, if you use only as much money as you are willing to lose on a single trade, you can never lose more than that amount, effectively, putting on a “stop loss” for your portfolio right from the onset.

Using Only Money You Intend To Lose Example

Assuming you have a fund size of $100,000 and you set your maximum portfolio risk as 1% per trade. This means that you wish to lose no more than $100,000 x 0.01 = $1000 in a single trade under the worst case scenario. You are bullish on QQQ and wish to buy its Jan50Call asking for $1.00.

You will therefore buy only $1000 / $100 = 10 contracts of the Jan50Call to ensure that the most you can lose in this position is $1000 or 1% of your portfolio.

Of course, going strictly by the definition for stop loss, which is to set up order or orders in order to stop a position from further losses, this method isn’t a real “stop loss method” per se but rather just sensible position sizing and trade planning which are essential steps in options trading. However, this is truly the simplest way beginners to options trading can predetermine maximum risk with complete certainty.

Options Stop Loss: Stock Price Based or Options Priced Based?

When you trade stocks, your stop loss decision can only be based on the price of the stock. However, because options are derivatives and derive their value from their underlying stock (or asset), their value can change as long as the price of the underlying stock changes. This happens even without the options themselves being traded. Stock prices only change when the stock gets traded but in options trading, options price can change with changes in the price of their underlying stock without the options being traded at all (this is measured by the options greek “Delta”). This opens up the possibility of basing the stop loss of your options position on the price of the underlying stock instead of the price of the options themselves. This is known as Stock Price Based stop loss policy.

Stock Price Based stop loss policy simply means selling your options position when the price of the stock is deemed no longer favorable for the outlook of your options position. Here’s an example:

Stock Price Based Options Stop Loss Example

Assuming you bought one contract of QQQ’s $65 strike price call options at a premium of $1.40 when QQQ was trading at $65, expecting the price of QQQ to go upwards. From your comprehensive technical analysis on QQQ’s price chart, you determine that if QQQ drops to $63 instead of rising, it’s trend would be deemed changed and there will be little to no chance of QQQ going upwards within your expected timeframe as previously predicted. As such, you set a Stock Price based options stop loss order to sell your call options when the price of QQQ drops to and below $63 in order to salvage any remaining value in the call options at that time.

Of course there is the more traditional way of making your stop loss decision in options trading based on the price of the options themselves. This is extremely useful when you wish to set a predetermined maximum loss per trade. This is almost exactly the same as trading stocks apart from the fact that modern options brokers give you plenty of ways to customize this seemingly simple stop loss policy to your individual and specific needs.

Options Price Based Options Stop Loss Example

Assuming you bought one contract of QQQ’s $65 strike price call options at $1.40 when QQQ was trading at $65, expecting the price of QQQ to go upwards. You wish to keep maximum risk for the options position to 30% in accordance to your options trading rules and therefore designed a stop loss to sell the call options if its value drops to $1.00 ($1.40 x 0.7 = $0.98).

Options Stop Loss: Manual or Automatic?

Manual stop loss simply means monitoring your exit point and then executing the stop loss trade manually when it happens. This could be extremely time intensive as the trader would have to watch intraday price action intently and also risk holding positions overnight with no protection (stock price or option price could open the next day with a huge gap that exceeds your stop loss expectation.).

Manual stop loss not only applies to an options price based stop loss policy but can also apply to a stock price based stop loss policy. This done by executing your stop loss when the price of the underlying stock exceeds the price which you have predetermined in your head (or written down on paper) as the stop loss point.

In both stock price or options price based manual stop loss, options traders simply sell the position using either a Limit Order or a Market Order (read sections below for explanation) without putting them on beforehand and is frequently used in day trading.

Manual stop loss is of course discouraged for retail options traders due to the obvious drawbacks and risks described above. On top of that, manual stop loss also engages the emotions of the options trader at the moment of execution and may result in the options trader not selling the position due to fear or greed even when the predetermined stop loss point is reached.

Automatic stop loss is placing your stop loss orders before they are actually reached, typically right from when the options positions are filled, so that your specific stop loss policy can trigger automatically when stop loss conditions are met. Automatic stop loss can be as simple as setting a Stop Limit order for your options position or as complex as selling your options positions only when the last price of its underlying stock reaches to, above or below a certain trigger price. Automatic stop loss methods includes (but not limited to) the basic Limit Order, Stop Limit and advanced orders such as Trailing Stop Loss and Contingent Orders (also known as “Conditional Orders”). This is most commonly used by all systematic options traders, including swing traders, position traders and day traders (learn more about the different options trading styles).

Options Stop Loss: Limit Order

A limit order is a simple stop loss method that tells the options broker to sell the options position at the specified price or better. Limit orders are best used for manual stop loss policies due to the fact that limit orders override all other existing orders and queue the options position for sale in the options market instantly. If a limit order is set too far away on a thinly traded options contract, it could even lure Market Makers to set the price of that option down to match your lower order before bringing the price back up to the prevailing market price. As such, limit orders are rarely used as an automatic stop loss method in options trading where the order is put on the moment a position is put on.

Options Limit Order Example

Assuming you bought one contract of QQQ’s $65 strike price call options at $1.40 when QQQ was trading at $65, expecting the price of QQQ to go upwards. You wish to keep maximum risk for the options position to 30% in accordance to your options trading rules and therefore designed a stop loss to sell the call options if its value drops to $1.00 ($1.40 x 0.7 = $0.98). As you are day trading, you decided to monitor and execute this stop loss policy manually.

Assuming QQQ takes a hit and your $65 strike price call options drops to $1.00. You feel that it is time to sell for stop loss and placed a limit order to sell to close the call options at $1.00.

Options Stop Loss: Market Order

The problem with using the limit order above is that you are telling the broker to sell the position at $1.00 or better. This means that you could miss the whole exit trade if those call options dropped below $1.00 before your order is completed and never get back up to $1.00. By using a market order, you are telling the options broker to fill at any price the market is offering at the moment (market price) so that the order is filled as quickly as possible. Using this order means that you will never miss your stop loss trade, however, it also mean that if the market price happen to be very bad at that time, you might get filled at a price lower than you expect.

Options Limit Order Example

Assuming you bought one contract of QQQ’s $65 strike price call options at $1.40 when QQQ was trading at $65, expecting the price of QQQ to go upwards. You wish to keep maximum risk for the options position to 30% in accordance to your options trading rules and therefore designed a stop loss to sell the call options if its value drops to $1.00 ($1.40 x 0.7 = $0.98). As you are day trading, you decided to monitor and execute this stop loss policy manually.

Assuming QQQ takes a hit and your $65 strike price call options drops to $1.00. You feel that it is time to sell right away before things get any worse. You place a sell to close market order to sell the position immediately at whatever best price the market is offering at that time and was filled right away at $0.90. Slightly worse than your expected $1.00 but at least you got out without any further risk.

Options Stop Loss: Stop Limit

Stop limit is a simple automatic stop loss method based on the options price. This kind of order has been used much earlier in stock trading and are more familiar with stock traders turned options traders. A Stop Limit is simply an order to sell the options position at a specified price when the price of the options reach the price specified in the Stop Limit order. A stop limit order turns into a limit order at the specified price when triggered. This means that it will only fill if the price of the option is at or better than the price stated in the stop limit order.

Options Stop Limit Order Example

Assuming you bought one contract of QQQ’s $65 strike price call options at $1.40 when QQQ was trading at $65, expecting the price of QQQ to go upwards. You wish to keep maximum risk for the options position to 30% in accordance to your options trading rules and therefore designed a stop loss to sell the call options if its value drops to $1.00 ($1.40 x 0.7 = $0.98).

As such, you decided to put on a Stop Limit Order in order to SELL TO CLOSE the position at $1.00.

Assuming QQQ takes a hit and your $65 strike price call options drops to $1.00. The Stop Limit Order is triggered and transforms into a limit order to sell at $1.00.

Options Stop Loss: Trailing Stop Loss

Trailing stop loss is an advanced order type which automatically tracks the highest price an option has reached within the lifespan of the order and sell the position automatically if the price retreats by a certain monetary amount or percentage. As the trailing stop loss system tracks and sells an options position when prices retreat by a predetermined amount from its peak price, it is not only a stop loss method but also a profit taking method. The trailing stop loss order can be triggered based on both stock price or options price so it serves the options stop loss purpose of both stop loss methodologies.

Options Trailing Stop Loss Order Example

Assuming you bought one contract of QQQ’s $65 strike price call options at $1.40 when QQQ was trading at $65, expecting the price of QQQ to go upwards. You wish to keep maximum risk for the options position to 30% in accordance to your options trading rules and also wish to take profit automatically should the option’s price pulled back 30% from its peak price achieved during the course of holding the options position.

As such, you decided to place a Trailing Stop Loss order triggered based on 30% retreat of your options price.

Assuming QQQ rallies as expected, taking the price of your call options to $3.00 before it starts to drop downwards again. When your call options price falls 30% from $3.00 to $2.10, the trailing stop loss is triggered and your call options are automatically sold to prevent its price from dropping any further.

Learn more about Trailing Stop Loss.

Options Stop Loss: Contingent Orders

Contingent orders, also known as Conditional Orders, are extremely advanced automatic orders that can be used for stop loss as well as entry or to automate any kind of trade or position management. Contingent orders simply tell the broker to execute a trade or a series of trades contingent upon the fulfillment of certain predetermined criteria. Indeed, every single parameter of contingent orders can be customized to perform exactly what you need. In fact, very cleverly designed contingent orders could even take care of entering an options trade when the stock price reaches a certain price and then immediately trigger a trailing stop loss or another contingent order for stop loss after that position is filled, completely automating your entire options trade! Contingent orders are most commonly used as automatic stop loss based on stock price by selling the options when the stock reaches the predetermined stop loss price.

Options Contingent Order Example

Assuming you bought one contract of QQQ’s $65 strike price call options at $1.40 when QQQ was trading at $65, expecting the price of QQQ to go upwards. You determined through technical analysis that if QQQ drops down to and below $60, the chances of it going upwards by expiration of your call options will be nearly zero. You determined that as long as QQQ remains above $60, its chances of going upwards remains high. As such, you decided to set up a contingent order to sell your call options at the prevailing market price when QQQ drops below $60.

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