{"id":19629,"date":"2022-04-18T07:30:46","date_gmt":"2022-04-18T11:30:46","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=19629"},"modified":"2022-04-18T07:30:46","modified_gmt":"2022-04-18T11:30:46","slug":"this-is-important-to-limit-downside-risk","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/this-is-important-to-limit-downside-risk\/","title":{"rendered":"This Is Important to Limit Downside Risk"},"content":{"rendered":"

I’ve been receiving some good questions from readers lately.<\/p>\n

So, in today’s essay, I want to answer a common question about stop losses I often get asked…<\/p>\n

\n

Should I have stop (loss) orders on all of my options trades? How long should I wait after getting into a trade before I put a stop (loss) order on it?<\/p>\n

– Brian<\/strong><\/p>\n<\/blockquote>\n

That’s a great question, Brian. Stop orders are designed to protect a profit or limit a loss. When trading stocks, it’s important to use stop orders to limit your downside risk so that one bad trade doesn’t blow up your account.<\/p>\n

But when buying speculative call<\/a> and put options<\/a>, it’s different. You see, the most you can lose when buying an option is the premium<\/a> you spend on it. So, your potential loss is already limited to a small fraction of the stock price.<\/p>\n

As long as you exercise<\/a> proper position sizing and don’t take on an option trade that is far larger than appropriate for your account, then you don’t need a stop-loss strategy when buying options.<\/p>\n

Yes… you do need to be willing to lose 100% of the premium you spend on puts and calls. But losing 100% of a $1 or $2 option premium is far better than losing 10% or 20% of a $50 stock.<\/p>\n\n\n\n
\n

Free Trading Resources<\/strong><\/p>\n

Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

But once an option trade is profitable, it makes sense to set a stop-loss price. As a trader, the worst feeling I get is when I’m watching a profitable trade turn into a loser. Don’t let that happen.<\/p>\n

As a general rule, once an option position is up 50% or so, I’ll set a stop at my breakeven price. Then I’ll keep raising the stop as the trade continues to move in my favor. This way, I’m ensuring a profitable trade.<\/p>\n

Finally, I almost NEVER enter stop-loss orders – on stocks or options – with my broker.<\/p>\n

There’s just too much potential for “monkey business” if an options market maker looks at a quote screen and sees thousands of option contracts (from my subscribers) with stop-loss orders at the same price, and within range of being hit.<\/p>\n

It’s better to keep your stop-loss as a mental note. Watch the position. And if the price hits your stop, then enter an order to exit the trade.<\/p>\n

Of course, if you can’t constantly watch the position during the trading day, then your only alternative may be to enter your stop order with your broker. Or set your stop based on a closing price. Then you can exit the next day.<\/p>\n

Best regards and good trading,<\/p>\n\n\n
\"signature\"<\/td>\n<\/tr>\n<\/table>\n

Jeff Clark<\/p>\n

<\/p>\n

Reader Mailbag<\/h2>\n

Do you set a stop-loss as a mental note, or do you go through your broker?<\/p>\n

Let us know your thoughts – and any questions you have – at feedback@jeffclarktrader.com<\/a>.<\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Your broker shouldn\u2019t see it…<\/p>\n","protected":false},"author":49,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ep_exclude_from_search":false,"service":"","footnotes":""},"categories":[1],"tags":[],"publication":[10],"person":[7],"newsletter-type":[],"ticker":[],"class_list":["post-19629","post","type-post","status-publish","format-standard","hentry","category-market-minute","publication-market-minute","person-jeff-clark"],"acf":[],"_links":{"self":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/19629","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/users\/49"}],"replies":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/comments?post=19629"}],"version-history":[{"count":0,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/19629\/revisions"}],"wp:attachment":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/media?parent=19629"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/categories?post=19629"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/tags?post=19629"},{"taxonomy":"publication","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/publication?post=19629"},{"taxonomy":"person","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/person?post=19629"},{"taxonomy":"newsletter-type","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/newsletter-type?post=19629"},{"taxonomy":"ticker","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/ticker?post=19629"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}