Stop Loss on Credit Spread

A stop loss is a technique used by traders to limit a loss on a position when they are unable to watch the markets. Most retail traders have other jobs they are not professional traders who sit by their computer all day long watching their positions therefore they will use stop losses to help them out of a position. For example if a stock they are holding is at $50 you might have a stop loss at $45. Something happens to the stock and it starts to drop, if the stock drops below $45 then an automatic sell is placed for you by your broker. Now this can be done for options as well, for example you buy an option at $2.00, you can set a stop loss at $1.50 if the option falls below $1.50 an automatic sell will be placed.

Although this is a great idea for stocks, I would not place a stop loss on a credit spread on the actual option trade itself. Instead since the way I trade credit spreads (How to Trade Conservative Credit Spreads) uses technical indicators on the stock itself I use the stock as a stop loss. Similar to what Pete Stolcers’ explains in his post Option Credit Spreads - Where Should I Place The Stop Loss? a stop loss should be placed on the stock, below support for a Bull Put Spread and above resistance for a Bear Call Spread. It just makes more sense to use an exit based on similar technicals that you used to get into the trade.

credit spread, option credit spread, stop loss

Changing my tune: Looking for a Bull Put Spread

Well over the last week the SPX has been making a pretty good recovering and technically speaking it appears to be making a Bull Flag pattern - a bull channel with a rising support and a lower rising resistance.

With the index just above the 50 dma, it is time to look for a bull put spread. Looking at the channels support line, the 50 dma, and the 30dma, it will be a good idea to start looking for a trade below the 1250 point. For a very safe trade we can look below the 1200 point, however not sure if we will be able to gain enough premium without having to go too far out to make a trade below 1200 worth while.
Remember tomorrow is expiration, so check last months credit spread trades and close them if you have to.

bull put spread, option trade, spx

SPX going bullish??

Well there are some indications that sentiment for the markets is turning bullish, but it certainly is noncommittal. The SPX just will not advance beyond the resistance point. So we are waiting yet another day to see what the markets will do before making a trade.

This is where speculators get hurt! The markets are at a point in which it can go either way. It can either bounce off resistance and continue bearish or if there is enough pressure behind the markets they can push past resistance and change to a bullish trend. At this point it is a gamble, a guessing game, this is where the conservative trader sits out, waits and watches and places the trade after the move has been made. Really conservative traders wait until confirmation of the move is made.

For now lets see what tomorrow brings.

markets, spx, stock market

Still waiting for a trade

You may have noticed that I did not post an SPX credit spread trade on Monday. The reason - I did not place one. With only two weeks to go until expiration I did not have a trade that fit my criteria, so I waited. Now look what happened today!

The SPX still did not break resistance, but we should wait until tomorrow to see what happens, if it bounces or breaks through. I am not going to guess here I will wait and let the market tell me which direction it is wanting to go.

So we are in a holding pattern for a credit spread trade, we have time for next months expiration.

credit spread trade, credit spreads, spx

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