Stephen Cooper

Stop loss order

Handy Chandra said: "Dear Dr. Dan, In order to have good risk management, I need your guidance for exit plan for spread trading (vertical or horizontal) using order type which generally provided by the broker's trading platform, as you have informed on your webinars. Example, if I have a put credit spread of SPX 1370/1365 for $1.0. When the underlying is against moving into my short leg (P1370), at which point I must get out from the trade with buy back the whole spread ? And what is the best stop order I can use to minimized the loss ? Should I set to buy back once I got filled ? At which value , $ 1.5 , $ 2.0 ? Please comment some exit scenarios as below (which one is the best): Scenario 1 : The underlying move to the short leg and touched 1380. Exit decision : get out from the trade, at whatever cost to buy back the whole spread. Cons : Our loss will be higher than the credit received - $1.0 (I guess, because I can't calculate how much price should I paid to buy back the spread). Trading platform order : Using pegging stock stop limit, i.e. when the stock touched the 1380, the spread will be bought back. Appreciate if you could give detail calculation on what price should I pay to buy back the spread. Scenario 2 : The underlying move to the short leg and our spread now is higher than credit recieved. Exit decision : get out from the trade at $ 1.5 or $ 2.0 debit, which is set once our spread got filled. Trading platform : we set day trade order to buy back the spread. Cons : Probably it will got hit earlier, because the underlying is extremely moving against and come back. So instead of profit, we'll loss $0.5 or $2.0 How is the probability not to get hit earlier ? Is there any method to avoid ? Scenario 3 : Please advice ...... I think it'll be nice if you write on your blog regarding the exit plan for other strategy as well, like horizontal spread, bwb, etc., because a newbie trader like me need such info to get out in any position with using good risk management. Best regards, PS : Holzie, appreciate for your comment, as your brief description to exit or rolling position for IC trade."

drdan said: "Handy, First Dan Sheridan from CBOE and myself are two different people (he's the options EXPERT, I'm the good looking one :laugh: ), although our trading philosophy is similar, I do not have any webinars only the blog right now. Second I do not ever use stop losses on credit spreads, you usually get killed and just like you are proposing there are several different scenarios that can occur so using a generic stop loss does not work. If the stock or index reaches a certain point (usually support or resistance) I reevaluate the trade. If I am in the profit I will close the trade completely. If I am at a loss I will evaluate to see if I should move the trade (adjust to the next support/resistance point) or close out for the loss and unfortunately that depends on how much credit I receive from the adjustment. You have seen Holzie do the same thing here recently with the RUT trade, adjusting like mad to save the trade from a complete loss and I think under the circumstances he did extremely well and made good trading decisions so he can live to trade again. Here is the whole problem with spread trading and condors - You asked - "Appreciate if you could give detail calculation on what price should I pay to buy back the spread." Unfortunately I can not because it will be different in every situation depending on volatility, time left till expiration, and all the other factors that go into pricing an option. TOS tries to do so with its software and does a decent job of it, however I'll have to refer to Holzie because he uses it more than I. Holz was it able to predict the prices correctly for what you are left with now in your trade, before the crash? I don't expect that it did, because volatility has increased thus changing the option prices. I mean the day of the crash was a killer if you tried to get out of your spread trades. And Handy you have convinced me, my next topic after volatility will be exit strategies."

Handy Chandra said: "Dr.Dan, Apologize for mis-understanding, because your trade ideas is very similar with the Dan Sheridan's webinar and both of you have "Dan" :laugh: . And I agree that you're a good looking option guru. But if one can't watch the monitor, and the big gap coming like last two weeks tuesday, we don't have time to re-evaluate. Is there any automatic trigger in general platform trading (TOS or IB) which could help us to exit ? I will anxiously waiting your next writing for exit strategies for various trading strategies in your blog. Kind regards, PS : Holzie, any taught from you is highly appreciated."

thezster said: "[QUOTE=Handy Chandra] . And I agree that you're a good looking option guru. [/QUOTE] Dr. Dan is "THE" good looking guru..... (I've got the "THE" part - his wife is the only one who agrees with the good looking part).... :)"

holzie said: "[QUOTE]Unfortunately I can not because it will be different in every situation depending on volatility, time left till expiration, and all the other factors that go into pricing an option. TOS tries to do so with its software and does a decent job of it, however I'll have to refer to Holzie because he uses it more than I. Holz was it able to predict the prices correctly for what you are left with now in your trade, before the crash? I don't expect that it did, because volatility has increased thus changing the option prices. I mean the day of the crash was a killer if you tried to get out of your spread trades.[/QUOTE] You are exactly right. The trading 8 months prior was different than what it is now after the big drop. I am no longer able to rely on my calculated prices for buying back positions. You saw what happened to me this month, I couldn't react fast enough when the prices tripled over what my calculation were at that time, leaving me in a loss position. It would take me more money to "buy it back" than letting it just expire and taking the loss. The volatilities are so extreme that you can actually get 0.50 credit on the April April 1240/1250 SPX spread, whereas the month before you couldn't get 0.10 for the 1350/1360 spread -- not that's fear. There is no rght thing to do here. If you really want to do a stop loss while you're away, you would have to set the stoploss according to the index price and buy it back at market (which would give you "natural" execution). For example, if you have the 1300/1310 spread and you think that the SPX should not break down to 1350 but it DOES, you can have a standing order to buy it back at market when SPX trades at or below 1350. The downside of this is that the price you may pay, could be higher than your max loss and once you pay it, your cash is gone. What I did was to accept the max loss but I was chipping it away with getting additional credits . The iron condor is still a great strategy, even the credit spread. It was pretty much our stupidity for not "listening" to the market. I don't want to say that I predicted the "crash" but if you remember, I mentioned in this thread, one week before it happened that the VIX had an insane call buying activity in the 18 and 19 strikes and that the correction might not be just some talk. Well I screwed up because I didn't act on it, so I can only blame myself.....it's not like this was a great surprise from out of the blue. And this is generally the problem with traders like me. I have acquired a really broad scope of knowledge from reading and learning about these things but then when I have a textbook scenario screaming at me, I fall back on my 8 months worth of iron condor trading experience ...I was thinking that since I managed through the raging bull I could do it through the bears -- but bears are so much different than bulls. So obviously this was a quite costly lesson to me, but I already shrugged it off and going on into April soon. The view here is long term not short term. Holz."

drdan said: "[QUOTE=thezster]Dr. Dan is "THE" good looking guru..... (I've got the "THE" part - his wife is the only one who agrees with the good looking part).... :)[/QUOTE] AAAHHH...thanks Z :o"

drdan said: "[QUOTE=holzie] -- but bears are so much different than bulls. [/QUOTE] The markets drop faster than they gain, which accounts for higher volatility and bigger premiums, much better for selling. The rest of your post was excellent - since it mimicked what I was saying ... LOL! ANyway, right now as far as strategies I am still waiting. I see in the DOW support at 12,000 and resistance at 12400. IF we break through 12,000 we will see some bears and if it breaks through the 200 dma (11,800) we will be bear for sure!!! Being Bear is great for credit spread traders because we are selling and again the markets drop faster than they gain so BEAR CALL Spreads are the way to go. I am going to leave the IC's alone for right now."