Stop Loss Orders Futures / Options

Stop loss orders is a form of risk control but in no way guarantees your position can not lose more than you plan to risk in a trade. Then reason is because of trading gaps where a market can open up way past your stop loss order and you will be filled some where at that gap price. A gap opening can be way away from you stop loss order.

That would give your position a much larger loss in your account. A market that opens locked limited can be very costly and you can't even get out as the market is locked at that price, in other words no trading now. What happens if your caught in a locked limit move for several days that can wipe you out or even bankrupt you.

If you trade straight futures long enough you will be caught in a locked limit move. I have a plan for that and most so called traders are not even aware of how to protect them selves in the event they are caught in a locked limited move. Never trade with out some from of risk control.

There are major stop loss orders and advancing stop loss orders as the market trades in your favor. When filled in a futures contract you could use a 3 day closing average off set by 3 days. This is a simple formula but it looks forward in time.

Example: Take the last three days close from the day before you fill counting back three days. Add the closing price up and divide that figure by three.

S&P 7/03 Entered at 675.50

Add the last three days.
7/02 close..674.75
7/01 close..673.95
6/30 close..674.20 = 2022.90
Divide that by 3 = 674.30. That is your stop loss price. This kind of stop loss order keeps you close to the market action.

If your trading the break out of a # 2 point you may elect to use the # 3 point as your first stop loss order. That depends on how far away from the entry point as for dollar loss. Once filled and market moves up and you get your short term profit you may want to move your stop to break even on the last few contracts your holding. I do this often.

Profit stop is a stop that after you have made a profit on say two of the three contracts you entered the market with and you feel the market is going higher.

Page 43

You want to give the market more room to move as it is moving back and forth. You simply figure the amount of points that you have in your profit and subtract in a up trend trade from your entry point or add to your entry point if your trading the down trend.

Example: You entered Live Cattle at 7000. you sold of two contracts at 7025 for your short term profit. You made in points on two contracts .0050 now subtract that from your entry point 7000 minus - 0050 = 6950 is your stop loss order.

Now if your stopped out you have more or less broke even on the over all position. This does not include commission.

Using a 9 DMA for a stop loss order is a good way to follow a trend providing the price level of the 9 DMA is an allowable loss according to your account size and your stress factor. I normally use it with three ticks under it in a up trend trade and three ticks above it in a down trend trade.

Options for a Stop loss in the future contracts. I call this a borrowed stop loss. If say I went long gold at 300 I will sell a 310 or maybe a 320 Gold call option. now I have collected premium into my account. If the market moves against me I make money on the options and loss on the futures side. but there will be some off setting loss because of my short calls. If I collected say $ 500 on the sell of the option ill risk about that on the futures and then close out both sides. It allows me to entry without first trying to figure my stop loss order using the futures price as my stop out point. If I am long 5 futures I sell 5 calls, in other words the same ratio.

I will use a reversing stop loss order. Using more futures contracts than I entered with. If I am long say 5 futures and I am using a price level below my entry price I may chose to sell 10 futures.

Page 44

If I get hit then I am out on the five I entered with but now I am short 5 contracts to the down side. Many times it will off set my loses and go on to make money. This is a hard thing for a trader to do especially after loosing on the first five.

It takes practice and practice to discipline your self to do this but more times than not it will save you a loss and go on to make a profit.

Lock limit move is ever traders night mare. If you trade long enough using straight futures you will sooner or later be caught in a lock limit move. This is when pure panic hits you as your thinking there is nothing you can do to get out or off set you losses.

Well, yes there is something you can do. You can sell and buy options against the move. If your long Soybeans and this market can do just that especially in the summer months go lock limit. Lets say the market at 7.00 and the next morning the market opens down lock limit. The futures contracts is not trading. You cannot do anything in the futures. But if that market has options the options will be trading. The position is called a synthetic futures. I am taking options and using them to create a short futures position. I can sell the 675 calls and buy the 675 puts. When the futures market starts trading again I would sell off the calls and puts and exit the futures thus off setting the loss in the long futures positions. It may not off set the entire loss but will do much for damage control in your trading account. Ever trader should have this knowledge and be able to execute this order. The opposite is true if the market goes lock limit up. You would sell the at the money put and buy the at the call. For each futures contract you will need one synthetic futures position. If you have 3 futures then you will need 3 synthetic futures position, that is selling 3 at the money puts and buying 3 at the money calls. Ever trader should have this knowledge and be able to execute this order. If not you have know business trading straight futures contracts!

USCoralSea :)