How can you put stops on options? (June 29, 2000)
The market really has no mechanism for stop orders on options. If you were to submit an order to sell an option at $3 below the current bid, it would show up on the board and a market maker would say 'thank you very much' and then sell it at the current bid price, pocketing the difference.
Some brokerages, in order to get your business, have set up systems to where you can place stop orders or stop limits on option positions. They treat them just as any other order and can handle them as such. Salomon Smith Barney and other large houses do it, but it is a new area for many online brokers. You have to check with each one as to the availability of this very important feature.
One thing to remember. Even a stop is not total protection, and it can be abused easier on options than stock. Market makers often use the excuse that 'the market was moving fast' when they take you out lower than the apparent bid and ask. We have challenged some trades, but to no avail. This happens more often when there are few open interests in the option. We find ourselves still buying these at times, but it is best to have at least 100 open, and preferably 500.
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