How to Use Stops with Options around VWAP Trading
Last Friday, I went over how you can use stops to your advantage to control your risk on trades.
(If you haven’t read that article yet, click here to do so right now.)
And to my email, I got a slew of good questions regarding stops.
After reading through them all, there were two topics that I wanted to get into today: how to set stops on [my broker’s] platform, and how to use stops when trading options.
The first question of “how to set stops” is easy to answer.
Google it.
No, I’m serious. Go open up a web browser, type in “how do I set stops on [insert your broker here]” and you’ll be surprised what you’ll find.
I use an old platform called Lightspeed that I’ve been using for decades now (I’m thinking about moving on from them). And I am in no way an expert in knowing how to place trades on other platforms.
If you don’t find what you need by looking it up online, then call your broker directly. If they’re worth their salt, they’ll be able to help you find what you need.
Here’s the kicker though.
If you find that you’re confused by your platform, your platform doesn’t have VWAP available, their customer service can’t help you, or any reason to be dissatisfied…
Think about getting a new platform.
But Kenny I’ve been with E-trade for 30 years now.
That’s fine. Keep your investment account with E-trade. They’re good for long slow investing.
But are they good for quick in and out trades?
Trading around the VWAP can be fast. And if the curmudgeons over at Big Money Investing Inc. don’t have what you want, there are plenty of alternatives out there.
Now onto our main topic of the day: options.
How to Play Options Around the VWAP
Options are great. They take your VWAP trades and multiply the gains.
As you may know, I have three rules when you’re buying options around the VWAP:
- Never buy options before an earnings report
- Always buy “at-the-money” options
- Always buy the closest expiration date
You want an options chart that mimics the VWAP as much as possible, so you can get the best price on your contract.
So, with that said, should you use stops on options?
If you’re just starting off, I would 100% say no.
Options don’t work like stocks. They’ll often mimic the movement of a stock, but there are a lot of factors that will make it so they don’t do it to the tee.
This is not to say that you can’t put stops on your options. But know that options pricing is a lot more volatile with a lot less volume than its respective stock.
There are a lot of traders out there who use stops to their advantage when trading options. But know that even if a stock isn’t doing anything, a stock’s option can start going down because you introduce the extra factor of “time”.
If you are starting off trading, and want to add options to the mix, I would first start by putting what’s called a “mental stop” on your options play.
A mental stop is when you have in your head the point at which you will exit a trade.
You can do this in two ways…
The first is by looking at the option trade itself. If you got in at ten cents and it’s up to 50 cents, you’ll probably want to take your money and run.
You want to take your profits and cut your losses according to the rules you set ahead of time.
Use the 2% rule if you need a baseline of where to start and how much to risk.
The second way to set your mental stop is by looking at the stock price itself.
If it’s breaking VWAP, you buy your option. If it’s rolling back over, you sell your option for a profit before it becomes a loss.
With options, you want to be quick, but you also need to be flexible.
Keep sending me your questions to KennyGlick@MoneyMapPress.com. I read every one that comes in, so I would love to hear from you.
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January 31 2023
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