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Contingent Option Orders

Discussion in 'Options' started by AKJ, Jan 11, 2016.

  1. AKJ

    AKJ Well-Known Member

    Hi all,

    Wanted to solicit some opinions on the best practices for setting up contingent orders on your option trades.

    In the recent round table, Dan Harvey mentioned putting in contingent orders to close put debit spreads in the event the market rises and reduces the value of the spread.

    I'm a little confused on how exactly you would go about this. Below is an example:

    Suppose you pay $10 for a put debit spread, and want to close it out if the value of the spread falls to $5. You do some analysis that shows the value is likely to drop to $5 if the underlying rises from 1900 to 1950. You can enter a contingent order that fires when the underlying trades through 1950, but what price do you put it at?? Sure, you expect the price to be $5, but what if the vols fall further than your modeling predicts, and the spread has already traded through $5. In a fast market, you could fire a contingent order that sits there as the market continues to scream up.

    Alternatively, if the vols remain higher than the model predicts, you could fire an order that is much lower than mid-market, and you get a bad fill.

    Right now, I have alerts that send me texts when the market reaches levels that require adjustments, but I analyze the prices of my spreads first before sending an order. Wondering how others handle adjustments.

  2. Scott Slivnik

    Scott Slivnik Well-Known Member

    Personally, I usually have contingent orders setup for my trades to buy put debit spreads and/or puts. I setup the orders just in case I am unable to connect to my broker platform for whatever reason. I do not setup contingent orders for the upside. If the market drops and I have access to my broker platform, it is rare for a contingent order to execute before I can cancel it.

    I would not setup a contingent order to close a debit spread at half price. I would setup an alert for that.
  3. Gail

    Gail Member

    I might set a contingent order to close a trade at a certain profit level. I know if it closes I will get that price or better.

    I agree with Scott, if the trade is down, I would set an alert.
  4. AKJ

    AKJ Well-Known Member

    Hi Gail,

    Thanks for sharing. At times, I have also set GTC orders to close a trade at my target profit level, but have gone away from that practice.

    I found that having these orders during the middle of the trading session is a good way to close your trades without committing much time to it, but one area where I regret it is when my trade has some delta in it, there is a gap or morning move that goes in my direction, and the GTC order is filled in the first few minutes of trading at my limit price. I try not to have GTC orders open during the first half hour to hour of trading to avoid this.
    Gail likes this.
  5. Rick

    Rick Active Member

    If I wanted to automate selling a put debit spread if the value decreased to a given price, I would use a GTC Stop or Stop-Limit order adjusted for the $5.00 in your example.
  6. GreenZone

    GreenZone Well-Known Member

    Bart, dacamon and Gail like this.
  7. Bart

    Bart New Member

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