OptionsAcademy

A stop order (also called a stop-loss order) automatically sells your position if the price falls below a specified level. Used to limit losses.

How It Works

You own a call option worth $300. You set a stop at $150 (wanting to lose no more than $150).

If the option falls to $150, your stop triggers and sells at the best available price (market order).

Pros

• Automatic Protection: Stops you from holding losers forever
• Peace of Mind: You know your max loss
• Hands-Off: You don't have to monitor constantly

Cons

• Execution Risk: Stops might fill below your stop price if the stock gaps down
• Whipsaws: Stop gets triggered on a dip, then stock recovers
• Not a Guarantee: In fast markets, you might get worse prices

Stop vs. Stop-Limit

Stop Order: Becomes a market order when triggered (will fill, but price uncertain)

Stop-Limit Order: Only sells at your limit price or better (might not fill at all)

Using Stops with Options

• Set stops at 50% of entry cost (lose half what you paid max)
• Avoid stops that are too tight (whipsaw risk)
• Remember stops trigger on any dip, not just your thesis being wrong

Pro Traders

Often use stops with spreads (which have defined risk anyway). Less useful for spreads since your max loss is known.

Related: Stop Loss, Stop-Limit Order, Order Types, Risk Management