Why Investors Shouldn’t Use Stop-Loss Orders When Trading Options
Proverbial Wall Street wisdom dictates that putting stop-loss orders on options is the best way to protect yourself when the stock market turns against you.
Stop-loss orders are designed to buy or sell a security when the stock moves past a predetermined exit/entry price point. Once the stop-loss order is triggered, it becomes a market order and the investor is given the lowest price on the market for the stock.
For example, many traders use stop-loss orders to protect their gains. After a stock price rises from $10 to $20, they may set a stop-loss order to sell if the stock drops below $17. That way, they don’t have to closely monitor the stock’s movement, but can still feel confident that if the stock’s price starts dropping, they won’t lose their whole profit.
While this method can limit the amount a trader will lose, this technique isn’t always the most profitable in a fast-moving market…
STOP Putting Stop-Loss Orders on Options
For today’s video, I want to cover how to use stop-loss orders on options.
I’m sure you’ve heard by now that the proper and smart way to protect yourself from losing too much money on a trade is by using a stop-loss order.
While you should always be practicing proper risk management, I think that using stop losses while trading options is for losers.
Here’s why: The other day I had long calls on a stock, and the calls were down about 40% from where I bought them. A few days later — when I was thinking about closing out of the calls and just taking the loss — the stock market rallied up about 30% on news.
The same options that I was considering closing out of went up fourfold… and I ended up making a boat-load of money.
If I had set up any stop losses a few days prior, I would definitely be kicking myself right now because they would have closed my position right before it turned into a big win.
If you’re using proper risk management — and you know you have a certain amount of money you can risk even if everything goes wrong — then you don’t need to put stop losses in place when trading options.
In fact if you are using stop-loss orders on options or thinking about it, then the chances are you’re doing this wrong…
Make sure to watch my video below to learn why traders shouldn’t use stop-loss orders on options and how it can ruin their trading. As always, leave your thoughts in the comments section below and don’t forget to subscribe to my YouTube channel to stay up to date with all things options trading.
P.S. After watching my video about using stop-loss orders on options, read this:
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