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.