Why can’t you use stops when trading option?

Stop Losses On Options

Which online trading platforms allow you to place stops on option trades?

A user has asked: I am looking for a UK based broker with a comprehensible (to me) platform/trade station for trading US (only) options – in USD; not GBP so in a USD denominated account albeit UK based.

I have tried 2 other trading platforms – IBKR I found to be far too complex for me to trade quickly – or frankly confidently. The other Saxo CM I have found easy to use – but crucially in its options trading facility does not provide a stop loss function and certainly not an adjustable one based on the underlying stock price – only a price warning/notification, which in volatile markets is probably not adequate – and anyway implies constant watching………….

If you could identify such a platform – I’d very much like to hear from you.

Can you place stops on option orders?

I’m afraid not, no you cannot put stop orders when trading options. So we can’t identify a platform that offers stops on US or any other options market for the very simple reason that they don’t exist on exchange.

Specifically when you are trading options direct on the exchange, and by DMA options we mean you place your order with your options broker and that buy or sell order sits on the underlying exchange orderbook. Which, in the case of US equity options would be the CBOE, or NYSE, or NASDAQ, depending on where the underlying stock or asset is traded.

Why can’t you use stops with equity options?

Unlike trading stocks, where there are plenty of buy and sell orders meaning that with liquid stocks in the main markets there is enough liquidity for relatively large buy and sell orders to be filled if the market moves quicky.

Not enough liquidity for option stop orders

However, with options, there is often only a small amount of orders at the bid/offer. So for example, there may only be a few lots available either side of the price and sometimes not market at all. If there is no price showing you can request quotes from market makers and they will flick up on the screen for a few seconds.

Option prices are too volatile for stop orders

As well as option prices being very illiquid they are also very volatile. Obviously this depends on how close or far the option strike is from being in or out of the money and how close expiry is. If the market was very thin a stop could be filled right down to zero or (in theory) all the way up to infinity.

To confirm the position we asked Matt Brief, Chief Product Officer at IG why you couldn’t use stops with options, he said

“Traditionally OTC trading firms do not offer stops on Options because of the increased complexity of how these markets are priced. When a client’s stop gets hit they will often query if it was taken out correctly. With our standard CFDs and Spread Bets we are able to show a chart of the underlying market. With Options we would often not be able to do this.”

“That said we are always looking to improve our offering and our currently looking at adding this functionality to the product. If we do go ahead with this, the additional functionality could potentially be ready around Xmas.”

Trading US options in USD or GBP.

You also asked about trading US stock options in USD. If you are dealing with a DMA broker all your transactions will have a P&L in the underlying contract currency, so if you are trading US stock options the P&L will be in USD. However, some brokers automatically convert P&L to your account currency, whilst others let clients run funds and deficits in multiple currencies.

If you did want to trade US stock options in GBP, you would have to go through an OTC broker which you can do through CFD trading or financial spread betting where you can trade in GBP even if the contract is in USD. If in doubt, double-check this with your broker before trading.

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