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Exiting an Option Trade


When exiting an option trade (that is, buying to close or selling to close), there are a few different ways you can take your leave. In this section, we'll discuss the variety of different ways you can take control over the closing end of your trade.

(Note: This section only discusses orders specific to buy/sell-to-close scenarios. To learn more general information about different order types and restrictions, such as day orders and limit orders, see Entering an Option Trade. For more information on exercise and assignment, please see Options Expiration, Assignment, and Exercise.)

Stop-Loss Order

The stop-loss order dictates a specific price level at which you'd like to exit the trade, most frequently when you're looking to limit losses. When trading options, you can base your stop-loss upon the price of the stock, or the price of the option itself. Once this "trigger" price is attained, your stop-loss will convert to a market order, and the trade will be executed at the current available market price. If the price of the stock or option is moving quickly, your actual exit price could be quite different from your stop-loss trigger. So, while the stop-loss promises a relatively speedy exit from the trade, it doesn't guarantee any particular exit price.

Stop-Limit Order

The stop-limit order offers a bit more control over your exit, as it converts to a limit order when triggered -- not a market order. In other words, the stop-limit specifies a minimum or maximum price at which the order may be executed, ensuring that you don't get punished by a fast-moving option premium. However, as with any other limit order, there's a risk that your order may not be executed if the necessary conditions aren't met.

One-Cancels-Other

The one-cancels-other (OCO) order -- technically, a pair of orders -- allows you to plan for two different potential scenarios. When one of the parameters is reached and the related order is executed, the other order is automatically canceled.

In this manner, you can plan to exit a position once the trade has attained either your target profit, or your maximum acceptable loss. After one of these thresholds has been reached, that half of the OCO is executed per your directions. Once that process is complete, the other half of the OCO is automatically canceled.

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