How to Calculate Stop Loss for Options
Let’s get one thing out of the way first: stop losses and options have a weird relationship.
You’ve probably used stop losses for stocks before: set a price, walk away, protect your downside. Clean. Simple.
With options? Not so much.
Options are like the emotionally complex sibling in your portfolio. More potential. More nuance. And more ways to screw it up if you don't plan properly.
So if you're wondering how to calculate stop loss for options, you're not alone. Let’s break it down without the fluff.
First: What Are You Actually Trying to Protect?
Seems obvious, right? But a lot of folks get tripped up here.
With options, you’re not always protecting a stock price. You’re protecting a premium (aka the price you paid or received) for the option.
- Bought a call for $3.00? That’s $300 per contract.
- Sold a put for $2.50? You collected $250, but you might need to protect against it blowing up to $6.00.
Your stop loss isn’t based on the underlying stock price alone.
It’s based on what the option is worth now vs. what you’re willing to lose.
And trust me, those are very different things.
Rule #1: Choose Your Risk Before the Market Does
Here’s the part most traders skip: deciding upfront what kind of loss you’re okay with.
You’d be shocked how many people “set” their stop loss after the trade starts going south.
Quick example:
You buy an option for $4.00. You decide you’ll risk 50%. That means your stop loss is $2.00.
Simple math. But here’s the kicker: you need to actually place that stop or mentally commit to exiting at that level.
Otherwise, you’ll ride it down to $1.50… then $1.00… then you’re just staring at your screen thinking, maybe it'll come back?
Spoiler: it won’t.
Methods to Calculate Stop Loss for Options
There’s no single “correct” method. But there are three main ones most traders use:
1. % of Premium Paid (or Received)
This one’s clean.
- Buy a call for $5.00? Set a stop loss at 50% = $2.50.
- Sell a put for $2.00? Set a mental stop if it hits $4.00.
Why it works: You’re defining your max pain up front. It’s trader therapy.
Why it’s tricky: Option prices move fast. And bid/ask spreads can get ugly.
2. Based on Underlying Stock Price
More advanced. Here, you say: “If the stock hits $X, I’m out.”
Let’s say:
- You bought a $100 call when the stock was at $98.
- You decide: if the stock drops to $95, I’m out.
You’re not directly stopping out on the option price. You’re stopping based on what the underlying is doing.
Why it works: Ties back to your original thesis. If your directional bet is wrong, you exit.
Why it’s tricky: Option values don’t move linearly. The option might not hit your expected value even if the stock does.
3. Delta-Based or Volatility-Based Stops
This is for the nerds (respect).
- You track Delta shifts.
- Or maybe you use implied volatility levels to guide exits.
If that sounds like gibberish, skip it. But for advanced traders, these can fine tune exits more precisely. Especially in multileg spreads.
How to Actually Place a Stop Loss Order on Options
Here’s where brokers make things annoying.
Not all platforms let you place traditional stop loss orders on options.
Some will, but with conditions. Others require you to use a stop limit or GTC (good 'til canceled) workaround.
And almost none work well with spreads.
So what do most serious options traders do?
They set alerts, not hard stops.
That way, you control the exit. You’re not at the mercy of a random mid-spread fill or overnight IV crush.
P.S. I've been burned by hard stops on options. It’s not pretty.
What About Spreads?
Ah, spreads.
If you’re running an iron condor, vertical, or calendar, calculating stop loss gets way more nuanced.
You’re not just watching a single option. You’re watching the net debit or credit of the entire position.
Best practice? Use your max loss as your reference point, and then pick a percentage of that.
For example:
- Max loss on a $5-wide vertical = $500.
- You’re willing to lose $200?
- Stop loss = when the position hits a $200 net debit (or $300 remaining credit, depending on how you opened it).
Again, alerts are your friend. Hard stop orders on multileg spreads = recipe for bad fills.
Final Thought: Stops Are About Discipline, Not Precision
Let me say the quiet part out loud:
No stop loss method is perfect.
Slippage happens. Markets gap. Orders don’t fill.
But calculating a stop loss before you enter the trade is less about predicting the future and more about protecting yourself from your own worst instincts.
Set the stop. Stick to it. And move on.
Honestly, that’s the real edge.
