“Logical stop-loss in Options” – What do I mean by that? If you are a beginner or an amateur, you may have wondered about this a lot of times.
In general, a logical stop loss varies from one situation to another.
Some of the logical stop-loss in options can be:
1. Swing high/low
2. Low of the Hammer / Inverted hammer
3. High of the Shooting star / Hanging man
4. Low of the demand zone
5. High of the supply zone
If you are trading in options, broadly there are 2 ways to set a stop loss. There are:
1. Place the SL using the spot chart
2. Place the SL using the Options chart
1. If you place a stop loss using the spot chart, then you don’t have to see the Options chart. But you won’t be able to calculate exact loss beforehand because the movement of spot vs options is not linear and depends on Option Greeks. This is a simpler method since you just have to see a single chart. Just enter and exit the trade using the spot chart only.
2. If you place the stop loss using the Options chart, you will be able to calculate the exact loss beforehand. For checking the options chart, you will have to use your broker’s terminal or use some paid third-party site. TradingView doesn’t provide option charts. This method is a bit difficult as compared to the first method.
The steps that you need to place a logical stop-loss in options are as follows:
a) Check the spot chart.
b) Execute your buy/sell order.
c) Notice the logical stop loss in the spot chart
d) Check the same SL in the options chart
4. Now open the options chart of the option that you bought/sold.
5. See the relative position of the stop loss in the options chart. (Whatever SL that you selected in the spot chart in step 3, select that same SL but now in the options chart.)
In the above case, suppose you Shorted Nifty. So, you can either buy a PUT option or sell a CALL option. The stop loss in both cases is as follows:
If you buy a PUT option:
If you sell a CALL option:
6. Now that you have chosen your stop loss, just place your stop-loss order. That’s it, you are done. This is how place a logical stop-loss in options.
Read the post a few times and you will be able to understand the process. Don’t complicate things. I hope you find this post useful.
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