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  1. avatar Tim_S says:

    Hopefully I can answer everyone’s questions … but if not, say so! I don’t mind answering questions, and the only bad question is the one you don’t ask.

    The first thing to remember is that, for this bull put spread, you have SOLD to open the trade. You’ve sold the 670 put, and then bought a 665 put as protection. The net credit to your account is $1.30. That means, for every spread you sell, if the trade is held until expiration (November 17) and doesn’t require any further transactions, you will get to keep the $1.30 credit to your account.

    The strike prices on the puts in your trade are below the current stock price. Therefore, as the stock price moves higher – away from your position – the dollar value of the trade is going to decrease in your account. But since you SOLD this trade, that’s a good thing … it means that it would cost you less to buy the trade back (and close it) than the amount you sold it for.

    However, if GOOG starts pulling back further, approaching the upper end of your spread ($670), the value of this trade is going to INCREASE. Again – since you sold this trade, that’s a bad thing. That means it costs you more to buy it back and close the trade than you made when you first opened it. Therefore, the stop loss order you would want to place is going to be a a higher dollar value than what the trade was opened for … because you sold the spread to open it.

    It’s just the opposite of when you a buy a stock that you think is going higher – you buy to open your position, and then set a stop loss order below where you see support at. That way, if the stock sells off, and breaks through that support, you get stopped out and the trade is closed, for a small (hopefully) loss. A buy stop order is no different … it works the same way, but in the example I just mentioned, you would use it when you were shorting a stock that you expected to go lower. You would want a buy stop to take you out of that position if the stock started moving higher.

    So …
    Since you sold this spread for $1.30 to open it, you would want to place a stop order to buy it back at $1.95 – and that difference is the $.65 stop loss that Dan recommended. That keeps your loss on the trade from being no greater than $.65 per spread.

    The volatility of the opening rotation won’t hurt too much unless the market really takes a dump.
    If you think about it, if GOOG starts to pull back further, of course the 670 put is going to get more expensive, but so will the 665 put you bought as protection. The difference in them will get greater as the stock moves lower, but on a spread position the impact of that volatility is less than if you were simply long calls or short puts – because of the protective put you bought below the one you sold, thus creating the spread.
    The other important factor is the level at which you opened the trade – 670 is below yesterday’s intraday low, which marks the near term support level for GOOG. Besides … if GOOG pulls back below Monday’s intraday low, you don’t want to be in this trade anyway. That would prove that the thesis for the trade was wrong, and that is ALWAYS the time for you to close a trade – when you know you were wrong, and the trade isn’t working.

    As far as how to write the stop – first, you have to have the trade opened already. You can’t set a stop order on a position you don’t hold yet, so you will have to wait for your order to get filled before setting the stop.
    Beyond that – unfortunately, it depends on your broker. Some brokers allow you to set specific orders that others do not. I have seen folks comment that they weren’t able to set a single order to close both sides of the spread, and instead they had to use two orders to close the trade. I have also seen traders indicate they can set a stop loss order based on the price of the stock – for example, immediately buy to close my bull put spread if GOOG drops below $670 per share. It’s just going to depend on the trading software you are using.

    I hope I’ve covered the questions everyone had. I also encourage you to ask questions in the Forum – specifically with regard to your trading software. I’m virtually certain that there will be others who use the same software you do, and they can give you much more insight on setting orders than I could try to provide.

    My best to all of you!

    – Tim

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