Calculating Stop/Loss - futures io
futures io



Calculating Stop/Loss


Discussion in Options

Updated
      Top Posters
    1. looks_one futs with 8 posts (3 thanks)
    2. looks_two LastDino with 6 posts (1 thanks)
    3. looks_3 everestinv with 6 posts (2 thanks)
    4. looks_4 myrrdin with 3 posts (4 thanks)
      Best Posters
    1. looks_one myrrdin with 1.3 thanks per post
    2. looks_two futs with 0.4 thanks per post
    3. looks_3 everestinv with 0.3 thanks per post
    4. looks_4 LastDino with 0.2 thanks per post
    1. trending_up 9,062 views
    2. thumb_up 10 thanks given
    3. group 6 followers
    1. forum 23 posts
    2. attach_file 0 attachments




Welcome to futures io: the largest futures trading community on the planet, with well over 125,000 members
  • Genuine reviews from real traders, not fake reviews from stealth vendors
  • Quality education from leading professional traders
  • We are a friendly, helpful, and positive community
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts
  • We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

(If you already have an account, login at the top of the page)

 
Search this Thread
 

Calculating Stop/Loss

(login for full post details)
  #1 (permalink)
everestinv
Phoenix
 
 
Posts: 5 since Dec 2019
Thanks: 4 given, 2 received

Is there a tool/software that anyone recommends to help calculate stop/loss for an option trade. I'm looking for a calculator that will calculate the percentage probability of making money goal profit percentage for an option.

For example, when I purchase a call option and it starts to go down I'm losing money, but if it recovers quickly I'll make money. Options aren't easy to just say "how much money do I want to lose?" because I've had options drop 30% and then recover and I've made 50% on the same options. However, over a long enough time period the probability goes down to zero and I'll never recover my investment.

So, is there a tool that will allow me to put in my call and then track the percentage/probability using time left and volatility to calculate when to sell before it's too late?

Thanks for reading and for any responses!

Reply With Quote
The following user says Thank You to everestinv for this post:

Journal Challenge April 2021 results (now extended!):
Competing for $1800 in prizes from Jigsaw
looks_oneMaking a Living with the Microsby sstheo
(248 thanks from 25 posts)
looks_twoSalao's Journalby Salao
(60 thanks from 12 posts)
looks_3Deetee’s DAX Trading Journal (time based)by Deetee
(48 thanks from 18 posts)
looks_4Learning to Profit - A journey in algorithms and optionsby Syntax
(37 thanks from 15 posts)
looks_5Maybe a little bit different journalby Malykubo
(17 thanks from 16 posts)
 
Best Threads (Most Thanked)
in the last 7 days on futures io
The Crude Dude Oil Trading System
83 thanks
Big Mike in Ecuador
76 thanks
Help improve the FIO community
41 thanks
The New Micro Contract - MICRO BITCOIN coming May 2021
29 thanks
Webinar: Seven Trading Mistakes Solved With Smart Tradin …
26 thanks
 
(login for full post details)
  #3 (permalink)
 futs 
Clearwater FL US
 
Experience: Beginner
Platform: Etrade, Tradovate and TOS
Trading: SPX, /ES, /MES, Options
 
Posts: 33 since Jan 2019
Thanks: 22 given, 19 received


Your research and trading plan will determine the stop loss. TOS, ETrade and TastyWorks each have option analyzers within them. But its you research (Back testing) that will determine what stop loss you will use for your trading plan.

Do you understand option greeks? 30 delta = 70% chance?

Reply With Quote
The following 2 users say Thank You to futs for this post:
 
(login for full post details)
  #4 (permalink)
 myrrdin 
Market Wizard
Linz Austria
 
Experience: Advanced
Platform: Zaner360, TWS, Vantage
Broker: DeCarley, IAB, RJO
Trading: Commodities
 
Posts: 1,784 since Nov 2014
Thanks: 2,930 given, 2,419 received

I trade a lot of options, but never was successful calculating a "standard stop loss" for options. Instead I get out of a trade if

1. an essential support / resistance in the underlying future is broken. Usually I choose end of day stops. The support / resistance line should correspond to an acceptable loss in the option.

2. the fundamentals of the commodity change significantly.

Best regards, Myrrdin

Reply With Quote
The following 4 users say Thank You to myrrdin for this post:
 
(login for full post details)
  #5 (permalink)
everestinv
Phoenix
 
 
Posts: 5 since Dec 2019
Thanks: 4 given, 2 received


myrrdin View Post
I trade a lot of options, but never was successful calculating a "standard stop loss" for options. Instead I get out of a trade if

1. an essential support / resistance in the underlying future is broken. Usually I choose end of day stops. The support / resistance line should correspond to an acceptable loss in the option.

2. the fundamentals of the commodity change significantly.

Best regards, Myrrdin

Myrrdin thanks for replying.

That's how I'm doing it today, but I find that often I make a good read, but I'm a day or two early, so I get out and then the stock bounces and I miss gains. I'm looking for a weight/metric to add to the health of the option once I've made the investment.

Reply With Quote
 
(login for full post details)
  #6 (permalink)
everestinv
Phoenix
 
 
Posts: 5 since Dec 2019
Thanks: 4 given, 2 received


futs View Post
Your research and trading plan will determine the stop loss. TOS, ETrade and TastyWorks each have option analyzers within them. But its you research (Back testing) that will determine what stop loss you will use for your trading plan.

Do you understand option greeks? 30 delta = 70% chance?

futs thanks for replying. I do use greeks to figure out which investments, but I'm looking for a way to calculate all the probability once I've made the investment.

Can you expand on this piece? "30 delta = 70% chance"

Is there a chart or calculation that translates delta into probability?

Thanks!

Reply With Quote
 
(login for full post details)
  #7 (permalink)
 myrrdin 
Market Wizard
Linz Austria
 
Experience: Advanced
Platform: Zaner360, TWS, Vantage
Broker: DeCarley, IAB, RJO
Trading: Commodities
 
Posts: 1,784 since Nov 2014
Thanks: 2,930 given, 2,419 received


everestinv View Post
Myrrdin thanks for replying.

That's how I'm doing it today, but I find that often I make a good read, but I'm a day or two early, so I get out and then the stock bounces and I miss gains. I'm looking for a weight/metric to add to the health of the option once I've made the investment.

I am successfully selling options on commodity futures for many years, but I do not have a lot of experience selling options on stocks.

I would like to add that I prefer using end of day stops.

Best regards, Myrrdin

Reply With Quote
 
(login for full post details)
  #8 (permalink)
 LastDino 
Legendary Pratik_4Clover
Mumbai, India
 
Experience: Beginner
Platform: TradingView & ZerodhaKite
Trading: Crude, NIFTY, BANKNIFTY
 
LastDino's Avatar
 
Posts: 890 since Jan 2019
Thanks: 2,744 given, 2,579 received

This is strategy exclusive, and if you want to dive deep into it, you not only have to figure out what your SL is but also Tgt. And if possible with your own option pricing model.

From what you've posted so far it seems you not only lack SL calculation but also tgt. With options you need to figure out what exactly you want to trade, some trade delta, some trade volatility, some don't even open greeks and do only in-out trade in 20 min solely based on underlying movement.

For example, if you are latter category trader where you are reliant on underlying movement, decide SL according to that, best case scenarios with SD calculations, which is more or less basic risk proxy.

Don't make it too complicated with all the equations, its never a "perfect" thing. Experienced option traders would even tell you that the conventional options pricing models like BS are not even that efficient. Because we lack one key thing, ability to predict exact "volatility", which is effected by too many variables to count, at least on retail end.

If you need, research more into hedging using Greeks on directional trades rather than perfecting or predicting "how much drop is okay till its too much to bounce back", fact of the matter is, there is really no such a thing in options, also why many people like futures.

Visit my futures io Trade Journal Reply With Quote
 
(login for full post details)
  #9 (permalink)
 bxman 
Kent / UK
 
Experience: Beginner
Platform: Sierra Chart
 
Posts: 162 since Nov 2019
Thanks: 23 given, 24 received


everestinv View Post
futs thanks for replying. I do use greeks to figure out which investments, but I'm looking for a way to calculate all the probability once I've made the investment.

Can you expand on this piece? "30 delta = 70% chance"

Is there a chart or calculation that translates delta into probability?

Thanks!

Hopefully not stating the obvious, but.... Delta equals the probability of being ITM at maturity. (as an approximate)

Sent using the futures.io mobile app

Visit my futures io Trade Journal Reply With Quote
 
(login for full post details)
  #10 (permalink)
 futs 
Clearwater FL US
 
Experience: Beginner
Platform: Etrade, Tradovate and TOS
Trading: SPX, /ES, /MES, Options
 
Posts: 33 since Jan 2019
Thanks: 22 given, 19 received



everestinv View Post
Can you expand on this piece? "30 delta = 70% chance"

Is there a chart or calculation that translates delta into probability?

Thanks!

I believe I should of stated it as a 30 delta has a 30% chance of being ITM at expiration, a 20 delta 20%, a 50 delta 50%, etc.

Its part of the option pricing within the options chain.

The only place I know of a metric close to what you are referring to is TastyTrades POP and P50 variables, but those are only calculated during entry.


POP is Probability of Profit (one cent)
P50 is Probability of 50%


So are you buying or selling options?

Reply With Quote
 
(login for full post details)
  #11 (permalink)
 myrrdin 
Market Wizard
Linz Austria
 
Experience: Advanced
Platform: Zaner360, TWS, Vantage
Broker: DeCarley, IAB, RJO
Trading: Commodities
 
Posts: 1,784 since Nov 2014
Thanks: 2,930 given, 2,419 received


futs View Post
I believe I should of stated it as a 30 delta has a 30% chance of being ITM at expiration, a 20 delta 20%, a 50 delta 50%, etc.

Its part of the option pricing within the options chain.

The only place I know of a metric close to what you are referring to is TastyTrades POP and P50 variables, but those are only calculated during entry.


POP is Probability of Profit (one cent)
P50 is Probability of 50%


So are you buying or selling options?

In his example he writes that he purchases a call option. In another comment he states that he trades stock options.

Best regards, Myrrdin

Reply With Quote
 
(login for full post details)
  #12 (permalink)
 futs 
Clearwater FL US
 
Experience: Beginner
Platform: Etrade, Tradovate and TOS
Trading: SPX, /ES, /MES, Options
 
Posts: 33 since Jan 2019
Thanks: 22 given, 19 received


myrrdin View Post
In his example he writes that he purchases a call option. In another comment he states that he trades stock options.

Best regards, Myrrdin

That's the confusing part. Usually if you are just buying an option you are looking for a directional move, which would be determined by your TA.

I seldom buy options, I sell options and base my stop (if used) on my R/R and backtesting results. When I do buy, I assume my max loss will be the debit paid.

Reply With Quote
 
(login for full post details)
  #13 (permalink)
everestinv
Phoenix
 
 
Posts: 5 since Dec 2019
Thanks: 4 given, 2 received


LastDino View Post
This is strategy exclusive, and if you want to dive deep into it, you not only have to figure out what your SL is but also Tgt. And if possible with your own option pricing model.

From what you've posted so far it seems you not only lack SL calculation but also tgt. With options you need to figure out what exactly you want to trade, some trade delta, some trade volatility, some don't even open greeks and do only in-out trade in 20 min solely based on underlying movement.

For example, if you are latter category trader where you are reliant on underlying movement, decide SL according to that, best case scenarios with SD calculations, which is more or less basic risk proxy.

Don't make it too complicated with all the equations, its never a "perfect" thing. Experienced option traders would even tell you that the conventional options pricing models like BS are not even that efficient. Because we lack one key thing, ability to predict exact "volatility", which is effected by too many variables to count, at least on retail end.

If you need, research more into hedging using Greeks on directional trades rather than perfecting or predicting "how much drop is okay till its too much to bounce back", fact of the matter is, there is really no such a thing in options, also why many people like futures.

I understand that is the way to calculate the stop loss (you are suggesting) and I understand it's up to me to be able to make the right read/prediction. But, what I'm asking is slightly different. I'm asking if there is a database, calculation, application that will analyze my option bought and calculate/track the probability of an investment return based on all the possible outcomes. ie. (you have x days left and if it goes up y you will make money, etc) I know its complicated and overkill, but I do have a use case for the data that will help me with analysis of when to sell my options.

Reply With Quote
The following user says Thank You to everestinv for this post:
 
(login for full post details)
  #14 (permalink)
everestinv
Phoenix
 
 
Posts: 5 since Dec 2019
Thanks: 4 given, 2 received


futs View Post
That's the confusing part. Usually if you are just buying an option you are looking for a directional move, which would be determined by your TA.

I seldom buy options, I sell options and base my stop (if used) on my R/R and backtesting results. When I do buy, I assume my max loss will be the debit paid.

Sorry for the confusion. I buy options and trade/sell them before they expire. Usually within a few days. Quick in and out.

Reply With Quote
 
(login for full post details)
  #15 (permalink)
 LastDino 
Legendary Pratik_4Clover
Mumbai, India
 
Experience: Beginner
Platform: TradingView & ZerodhaKite
Trading: Crude, NIFTY, BANKNIFTY
 
LastDino's Avatar
 
Posts: 890 since Jan 2019
Thanks: 2,744 given, 2,579 received


everestinv View Post
I understand that is the way to calculate the stop loss (you are suggesting) and I understand it's up to me to be able to make the right read/prediction. But, what I'm asking is slightly different. I'm asking if there is a database, calculation, application that will analyze my option bought and calculate/track the probability of an investment return based on all the possible outcomes. ie. (you have x days left and if it goes up y you will make money, etc) I know its complicated and overkill, but I do have a use case for the data that will help me with analysis of when to sell my options.

1. Figure out expected movement in spot/underlying
2. Plug in values into option pricing model applicable to your expiry style, values corresponding to your traded strike price
3. In place of current market price plug in value of from point number 1. Example: Expected bounce of 30 points in underlying, then Current underlying price + 30 = Value you should calculate for
4. Option pricing model will give you expected CE/PE value at that expected underlying value for the given volatility/days to expiry/rate of return (all of these are adjustable)
5. How these mentioned entities effect the price is something you have to read under relevant greeks.

This exercise will give you payoff/scenario calculations along with good looking graphs of your traded strike for the "Expected movement in underlying".

There are lot of free calculator available, usually they are there on broker terminal too. You just have to plug in values in it and click calculate. You can also make them in excel or anything else that you may using with some advanced mathematical functionality. Google, you will find it somewhere for free as these are very basics, complicated is whole another ball game, there are people who have invented their own option pricing model on this very site.

Books worth reading if you are trading options and plan to stick to it:
Options, Futures, and other Derivatives - John C. Hull

Trust me, it will help in long run.

If this is not what you are looking for then forgive my ignorance, I'm sure expert sooner or later will help you.

Visit my futures io Trade Journal Reply With Quote
The following user says Thank You to LastDino for this post:
 
(login for full post details)
  #16 (permalink)
 futs 
Clearwater FL US
 
Experience: Beginner
Platform: Etrade, Tradovate and TOS
Trading: SPX, /ES, /MES, Options
 
Posts: 33 since Jan 2019
Thanks: 22 given, 19 received


everestinv View Post
Sorry for the confusion. I buy options and trade/sell them before they expire. Usually within a few days. Quick in and out.

There is no reliable way, the only reliable probability is the probability at open.

The analyze tab will provide you with information stated in other responses. However, it seems like you are asking for a program to decode the BSM pricing model and perform some AI with difference variables. --- It probably doesn't exist and if it did the big boy bankers would not share.

If you want an answer from an options research group that has been trying to figure out a simple way to assist when to get out of a trade, email the tastytrade research team. They have mentioned creating a variable like POP or P50 that would help you know when to get out of a trade. I think one of their emails is Anton@tastytrade.com.

Reply With Quote
The following user says Thank You to futs for this post:
 
(login for full post details)
  #17 (permalink)
 LastDino 
Legendary Pratik_4Clover
Mumbai, India
 
Experience: Beginner
Platform: TradingView & ZerodhaKite
Trading: Crude, NIFTY, BANKNIFTY
 
LastDino's Avatar
 
Posts: 890 since Jan 2019
Thanks: 2,744 given, 2,579 received

It does exist, its just that one of the variables, IV is not something you can just calculate as its "expected forward" movement. One of the reasons BS is used by everyone is due to it being one of the only popular pricing models that has only one such an input, others are measurable like time.

So, to be more precise, if you really want to get around and develop some kind of AI to "Predict option prices", your first step should be estimating Implied volatility. Note that I again use word estimate, so even if you managed to re-invented the wheel, it will be still just an estimate.

If you do decide and make any progress in that direction, I would love to hear it.

Visit my futures io Trade Journal Reply With Quote
 
(login for full post details)
  #18 (permalink)
 futs 
Clearwater FL US
 
Experience: Beginner
Platform: Etrade, Tradovate and TOS
Trading: SPX, /ES, /MES, Options
 
Posts: 33 since Jan 2019
Thanks: 22 given, 19 received


LastDino View Post
It does exist, its just that one of the variables, IV is not something you can just calculate as its "expected forward" movement. One of the reasons BS is used by everyone is due to it being one of the only popular pricing models that has only one such an input, others are measurable like time.

So, to be more precise, if you really want to get around and develop some kind of AI to "Predict option prices", your first step should be estimating Implied volatility. Note that I again use word estimate, so even if you managed to re-invented the wheel, it will be still just an estimate.

If you do decide and make any progress in that direction, I would love to hear it.

IV is a result of BSM, not an input. Its the one variable you don't have.

So you agree you can't calculate directional move with option pricing, but you still think there is a way to determine the of a direction move and the length of the move to determine its probability? Then your first step is to estimate IV?

Do you have any data or references to your view on this being available or is this a hunch?

Algo's that read tweets and news have been trying to predict for years, No individual will accomplish this before one of the big trading firms with funding for teams of mathematicians and data analysts.

Reply With Quote
 
(login for full post details)
  #19 (permalink)
 LastDino 
Legendary Pratik_4Clover
Mumbai, India
 
Experience: Beginner
Platform: TradingView & ZerodhaKite
Trading: Crude, NIFTY, BANKNIFTY
 
LastDino's Avatar
 
Posts: 890 since Jan 2019
Thanks: 2,744 given, 2,579 received


futs View Post
IV is a result of BSM, not an input. Its the one variable you don't have.

So you agree you can't calculate directional move with option pricing, but you still think there is a way to determine the of a direction move and the length of the move to determine its probability? Then your first step is to estimate IV?

Do you have any data or references to your view on this being available or is this a hunch?

Algo's that read tweets and news have been trying to predict for years, No individual will accomplish this before one of the big trading firms with funding for teams of mathematicians and data analysts.

Do tell how to calculate IV when price of option is not known.

Visit my futures io Trade Journal Reply With Quote
 
(login for full post details)
  #20 (permalink)
 futs 
Clearwater FL US
 
Experience: Beginner
Platform: Etrade, Tradovate and TOS
Trading: SPX, /ES, /MES, Options
 
Posts: 33 since Jan 2019
Thanks: 22 given, 19 received


LastDino View Post
Do tell how to calculate IV when price of option is not known.

The better question is how do you know what the implied volatility is?

We know Time Value? We know UL value? We know strike value (auction market)?

People make the price by what they would sell and pay for it. Fear (IV) can be shown in what price people will pay or sell an option.

Like any other math equation it can be back-solved, which would only tell you the fair price value.

We are talking about an Auction Market. How is price discovered? Spreads?

Price drives Implied Volatility.

Here are some references/sites you can verify the info:

https://www.asxoptions.com/implied-volatility/
https://www.investopedia.com/ask/answers/060115/how-implied-volatility-used-blackscholes-formula.asp
https://www.tastytrade.com/
https://www.optionalpha.com/

Reply With Quote
 
(login for full post details)
  #21 (permalink)
 LastDino 
Legendary Pratik_4Clover
Mumbai, India
 
Experience: Beginner
Platform: TradingView & ZerodhaKite
Trading: Crude, NIFTY, BANKNIFTY
 
LastDino's Avatar
 
Posts: 890 since Jan 2019
Thanks: 2,744 given, 2,579 received


futs View Post
The better question is how do you know what the implied volatility is?

We know Time Value? We know UL value? We know strike value (auction market)?

People make the price by what they would sell and pay for it. Fear (IV) can be shown in what price people will pay or sell an option.

Like any other math equation it can be back-solved, which would only tell you the fair price value.

We are talking about an Auction Market. How is price discovered? Spreads?

Price drives Implied Volatility.

Here are some references/sites you can verify the info:

https://www.asxoptions.com/implied-volatility/
https://www.investopedia.com/ask/answers/060115/how-implied-volatility-used-blackscholes-formula.asp
https://www.tastytrade.com/
https://www.optionalpha.com/

I'm very confused about what you are trying to argue atm. Is it my view that I think it maybe possible for some genuise to derive or is it my words that it is "input"? Or something else?

Visit my futures io Trade Journal Reply With Quote
 
(login for full post details)
  #22 (permalink)
 futs 
Clearwater FL US
 
Experience: Beginner
Platform: Etrade, Tradovate and TOS
Trading: SPX, /ES, /MES, Options
 
Posts: 33 since Jan 2019
Thanks: 22 given, 19 received


LastDino View Post
I'm very confused about what you are trying to argue atm. Is it my view that I think it maybe possible for some genuise to derive or is it my words that it is "input"? Or something else?

I am answering a question you asked me two posts above... Is that not you?

"Do tell how to calculate IV when price of option is not known."

Simple answer - We do know the price since we are talking about an auction market.

Reply With Quote
 
(login for full post details)
  #23 (permalink)
 LastDino 
Legendary Pratik_4Clover
Mumbai, India
 
Experience: Beginner
Platform: TradingView & ZerodhaKite
Trading: Crude, NIFTY, BANKNIFTY
 
LastDino's Avatar
 
Posts: 890 since Jan 2019
Thanks: 2,744 given, 2,579 received


futs View Post
I am answering a question you asked me two posts above... Is that not you?

"Do tell how to calculate IV when price of option is not known."

Simple answer - We do know the price since we are talking about an auction market.


Oh, I see now, your issue seems to be this line of mine

Quoting 
"So, to be more precise, if you really want to get around and develop some kind of AI to "Predict option prices", your first step should be estimating Implied volatility. Note that I again use word estimate, so even if you managed to re-invented the wheel, it will be still just an estimate.".

I'm quite familiar with BS equation and how to back calculate IV from price you get from auction market or current market price.

Here I was trying to say, if you want to "predict" future price of option, you will have to "estimate the IV" for that calculation to work as you are trying to "predict option price", which you are "yet to get from auction market".

You can't work with one unknown to "predict or solve" other unknown. Choice of words may not have been clear back then, I hope its clear now? In fact, I think we agree on everything, from BS backward solving for IV from cmp to this statement of yours

Quoting 
Do you have any data or references to your view on this being available or is this a hunch?

Algo's that read tweets and news have been trying to predict for years, No individual will accomplish this before one of the big trading firms with funding for teams of mathematicians and data analysts.

Just to be more clear, I'm just trying to make OP aware of gravity of word "predict" with option price.

Visit my futures io Trade Journal Reply With Quote
 
(login for full post details)
  #24 (permalink)
 futs 
Clearwater FL US
 
Experience: Beginner
Platform: Etrade, Tradovate and TOS
Trading: SPX, /ES, /MES, Options
 
Posts: 33 since Jan 2019
Thanks: 22 given, 19 received


LastDino View Post

Just to be more clear, I'm just trying to make OP aware of gravity of word "predict" with option price.

Yes, I agree!

Reply With Quote


futures io Trading Community Traders Hideout Options > Calculating Stop/Loss


Last Updated on January 5, 2020


Upcoming Webinars and Events
 

NinjaTrader Indicator Challenge!

Ongoing
 

Journal Challenge w/$1,800 in prizes!

April
     



Copyright © 2021 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts