Trade Lesson on NFLX
We received the following e-mail today in response to our trade recommendation this morning on NFLX, which was to “short Sep (9/8) $165/155 bull put spread for $.62/share. Stop Loss: $166.38.”
“Hello Dan,
I have a trial for MT Options. I am an Options beginner. I understand the BPS strategy and also this trade. However, could you tell me how and why you choose the stop of 166.38 ? Also how do the stops on options work and are they based on a Market order at a certain stop price before expiration ?
Thanks, Tom”
After sharing the following response with Tom, we thought it would be helpful to share with other subscribers since Tom’s questions were very astute and Master Trader’s mission is to develop profitable and informative investors and traders.
I responded:
“Tom,
Thanks for writing, and your interest in our new service. Great questions.
Regarding the Stop, please see the below chart. We picked the wider level to start to give it “wiggle room.” Although using tighter stops will most times mean tighter losses, as long as the pattern is not “destroyed,” we like to give it room at first since it is a “time decay” trade. Then, in trade management, we raise stops.
We do use tighter stops, however, for Directional Trades.
The Stops recommended are based on the stock price. If triggered, we recommend using manual stops (not automated unless away from the computer – and never trade illiquid options for this reason) and try to get filled around mid-point for price improvement.
Some people use an arbitrary 2-3x of premium received as a stop, but we don’t since that does not correlate with the chart pattern most times.
Hope that helps Tom!”
Sign up for the Master Trader Weekly Options Trader here.
Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director of Master Trader
Pristine’s Founder and Creator of the Pristine Method
Dan Gibby
Chief Options Strategist
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