I come from futures trading. I fairly to new options and im trying to learn more. So im focused more on the loss aspect and having a great risk to reward. Im trying to figure out how stop losses work in options since you have this theta decay variable. So do you adjust stoploss everyday in the first few days of entering a trade when price is relative close to your entry? Because like what if price chills near where you entered for a few days or has a fakeout(wicks against you) within those days. Wouldn’t it be ideal to have a dynamic stop loss that changes based off your daily theta decay? Am i understanding right? Or am i wrong? The point im trying to make is i dont want my stop loss to get triggered because of the decay.
Posted by AccomplishedRule9241
8 Comments
Decay is a loss. You want a stop loss that isn’t triggered by a loss?
“There’s always a bigger stop loss” – Qui Gon Jinn
Stop Loss DOES NOT WORK ON OPTIONS, go back to Futures.
Copy/paste of my reply from your other attempt at this post:
Theta decay is the least of your worries. In general, stop loss orders don’t work very well on option trades, because trading volume is too low and price discovery can be pretty uneven. Having a stop gapped over by a large amount is a common occurrence. So if you trade anything other than the top 10 volume leader contracts, you’ll often be disappointed with stop losses.
Explainer here: https://www.reddit.com/r/options/wiki/faq/pages/stop_loss/
So what most option traders do instead is hedge their positions. That’s easier to do with options than futures, since put contracts give you a way to hedge a long position with another long position, or vice versa. Hedging is a big part of option trading so you should be able to find ample explainers on the web about various strategies and techniques. For example, at least half of the multi-leg structures are self-hedging, aka “defined risk.” You can also look into dynamic hedging, where you use delta as the hedge ratio and hedge with shares (assuming it’s an equity option). For example, if you are short a 30 delta put and want to hedge that position with short shares, you’d short 30 shares. Then adjust the number of shares up/down as delta evolves over time.
Don’t use stop loss for options. If you cannot figure out why, then it’s a good opportunity to learn.
Figure out what your willing to lose and set that as you stop loss and only trail it if your in gains dont increase your stop loss. If it hits your sl then you were wrong dont over complicate it. If your sl hits repeatedly then you need to play further out or increase the % of sl not the cash amount
The beauty of options is that you can be wrong for a long time before being right, and still come out profitable. All you need is to hit your target options price at *any point* during the duration of your trade. Whereas with futures, you get stopped out in that situation.
Are there no spreads/options with futures trading? I always assumed there was.
Buy Sheldon Natenberg’s “Options pricing and volatility strategies” If you truly read it and understand it then it will be one of the best investments you ever make.