Many TradeStops members trade options regularly, and many more are beginning to learn how to trade options. How can TradeStops help?

As option trading becomes more popular, the TradeStops team wants to help you understand what you can expect from TradeStops to help you manage your options trades.

Keep in mind that options are derivatives of an underlying stock or ETF. The price of an option is at least partly based on the price of the underlying stock. Also, every option will expire on a pre-determined date and will then cease trading.

Most options have a life-span of less than one year. Because of this, it’s impossible to determine a Volatility Quotient for the options. Even if we could determine a VQ for options, this number would be meaningless as the option will ultimately expire.

For our first example, let’s look at how to track an out-of-the-money call on Apple Inc (AAPL). AAPL traded recently at $140 per share. Someone bullish on AAPL might think that the stock can continue trading at all-time highs and move up to $150 per share in the next 6 months.

They might buy the August 145 call at a price of $5.50.

As with many investment strategies, we recommend that you set up a separate portfolio to track the options. You’ll notice that we’ve included the underlying stock in the portfolio in addition to the option.

We have a Stock State Indicator Alert for AAPL. AAPL has a VQ of 17.4%. An option trader might want to know if AAPL drops by ½ of the normal VQ. We can set up a customized trailing stop for AAPL by clicking on the “Alert” tab above or by clicking on the position itself and then opening the “Alerts” tab from the new window.

We’ll set up a trailing stop alert to trigger if AAPL drops 8.65% from this point in time.

Because there is no VQ alert available for the option itself, we’ll want to enter a customized trailing stop for this position. To do that, we need to create an alert for this position. When we click on the position itself and go to the “Alerts” page, it opens to a trailing stop alert. Let’s use a 50% trailing stop for this position.

We now have two alerts set up for the underlying stock and one for the option itself.

Trading options requires more oversight than just buying and holding stocks. The price of the option is not only based on the underlying stock, but other factors as well. We recommend that you follow these closely and adjust your option alerts as necessary based on your trading strategy.

Next week, we’ll focus on setting up alerts for covered calls and naked puts. If you have any questions, please contact our Customer Success team.

Tom Meyer
Education Director, TradeStops