The markets are all over the place.  Up a percent one moment then down a percent a moment later.  Overnight things just get worse – another blog about after-market and pre-market price changes is planned for the future.  If anything has been learned it is the importance of using a stop loss order.

A Stop Loss Order simply means that an order is triggered to happen if the price hits your stop value.  For example, you bought a call option contract for $1.00.  You really hope it goes up to $2.00 to double your money but you know that hope doesn’t factor into stocks.  You could place your sell order immediately after you bought your option just to be super safe at $.90.  This way if it drops suddenly you know you’re only going to lose .10 of value or in this case 10%.  If you’re not willing to lose 10% then you really shouldn’t be involved in options trading.

In a perfect world you place your stop loss order repeatedly keeping the 10% factor because the value will certainly move and a stop loss value too close to the price will likely trigger faster than you would like.  You want to stay in the game but still have protection.  If the value goes up to $1.20 you would then update your order to stop loss to $1.10 allowing an ABSOLUTE 10% gain but still ride the wave if the value continues up.  You then keep updating your stop loss assuming the value of the option continues to rise locking in an additional 10% gain.

Be warned.  Using a stop loss can be hard sometimes when the value drops but then goes back up.  Just today I doubled my money safely using a stop loss but had I been bold (0r stupid) I could have made 4X.  I’ve been burned many times both ways trying to hang in with hope.  Keep in mind that you simply don’t know where the value will go and seeing the value go back up after taking your smaller gain is a lot better than taking a loss.  You can always just do another order later!