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Setting Upside and Downside Limits

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A question I am asked as a trader is…

When do I exit a play?

Or…

How do I exit a play without being attached to my computer screen all day?

The answer is quite easy…

First, you must determine at what price you want to sell your position. Let’s assume that you have a standard “sell policy” once the option moves up by 20%.

Assume that you bought five options contracts for the AT&T January $38 calls for $1.

When you bought those options, you entered a limit order that reads: “BUY TO OPEN, 5 contracts of the AT&T Jan $38 calls, at a limit price of $1, good for the day.”

Now that you are in at $1, you have set your target to sell the option for $1.20, or a 20% profit.

On your computer, you pull up the same order form you used to buy the option. Here, you enter the following order: “SELL TO CLOSE, 5 contracts of the AT&T Jan $38 calls, at a limit price of $1.20, good for the day or good till canceled.”

When entering a good till canceled (GTC) order, you are instructing the broker to keep the order open for a period longer than that day. It could be weeks or months, or you could input an exact time that you wish the order will be good until.

If you want to protect your downside and sell on any upside move, you can place what is called a “one cancels the other” (OCO) order.

An OCO order allows you to place two orders at the same time. It combines a limit order with a stop limit order, but only one of those orders can be executed.

In other words, as soon as one of the orders get partially or fully filled, the remaining one will be canceled automatically…

It is important to note that canceling one of the orders will also cancel the other one.

This can be done with a broker or on an automated platform like TD Ameritrade’s thinkorswim. You will have to check with your broker and platform to see whether this is available.

Here’s how it works…

When you pull up a trade ticket on your platform, you will see a tab for “Type of Order.” One of those options will be OCO.

Click on OCO, and you will see three order levels…

Order Level 1: Where the option is currently trading.

Order Level 2: A lower limit.

Order Level 3: A higher limit.

Action Plan: The lower limit will be where you enter the stop price that you are willing to sell if the option drops in price. The higher limit is where you want to sell the option if the price rallies higher. Once you enter both prices and submit the order, you will have set a higher and lower stop.

To learn more about placing orders and setting limits, join me in The War Room today!

The post Setting Upside and Downside Limits appeared first on Investment U.

Founded in 1999, the goal of Investment U is to give you impartial, no-nonsense investment advice and investment research on how to build long-lasting wealth.


Source: https://investmentu.com/setting-upside-and-downside-limits/


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