option order based on stock price possible???

[Greyzy]

I am wondering if any internet brokers offer the possiblity to execute an order with options based on the price of the underlying stock.

Examples:
a) I want to buy call options if the stock rises above 25.75$.
b) After I bought the options I want to set a stop loss. So once the stock gets as low as 24.10$ I want to sell my options.

The reason I am asking is this: I would like to avoid making an estimation of what the price of the option might be once the stock reaches a certain price.

Thanks for your input!

[wallstreetsedge]

the answer is no

[aiki14]

I am wondering if any internet brokers offer the possiblity to execute an order with options based on the price of the underlying stock.

Examples:
a) I want to buy call options if the stock rises above 25.75$.
b) After I bought the options I want to set a stop loss. So once the stock gets as low as 24.10$ I want to sell my options.

The reason I am asking is this: I would like to avoid making an estimation of what the price of the option might be once the stock reaches a certain price.

Thanks for your input!

You can calculate what the options price for American style options should be for a particular strike, underlying, and time, using the Cox, Coss, and Rubinstein Binomial Tree. You can also use the Black-Scholes model for European options.
Here's a link for a Binomial Tree Calculator from my Aussie friend Pete Hoadley
http://www.hoadley.net/options/binomialtree.aspx?tree=B

Here's a calculator for the Black-Scholes model
http://www.numa.com/derivs/ref/calculat/option/calc-opa.htm

By using the calculators you can set limit buys for the options contracts.
Good Luck

[netwrangler]

I am wondering if any internet brokers offer the possiblity to execute an order with options based on the price of the underlying stock.

Examples:
a) I want to buy call options if the stock rises above 25.75$.
b) After I bought the options I want to set a stop loss. So once the stock gets as low as 24.10$ I want to sell my options.

The reason I am asking is this: I would like to avoid making an estimation of what the price of the option might be once the stock reaches a certain price.

Thanks for your input!I can name that tune in two notes!

With Schwab's StreetSmartPro [SSP] software, I can set an alert that will buy or sell an option when a stock increases/decreases to a certain price. Do that twice [once for the buy and once for the stop-loss] and you have what you asked for...QED.

Your example seems to be one that is anticipating a breakout, that is: if the stock goes above a certain resistance level, it may be running and I want to buy calls. If it turns out the stock isn't running, I want to bail.
I like the concept.

The only 'gotcha' with SSP is that you don't want to enter the stop-loss alert until after you have purchased the options [hence the "two note" lead-in]. It's not that you can't do that; it's that, in some scenarios, entering both alerts at once may not give you your stop loss.

But, let me beg the question?

Why do you want to avoid "making an estimation of what the price of the option might be once the stock reaches a certain price." I mean, I can think of several reasons for not wanting to do that; but I can think of other reasons to go ahead and make the estimate. Allowing the use of an estimated option price can increase your choices in setting up alerts.

SSP has a built-in black-scholes calculator for estimating option prices at various stock prices, volatilities, and days remaining for the option. There are similar calculators available for free on the Web. Peter Hoadley's site has a good one and other freebies in the options area to boot. Point is, your aversion to estimating the option price should not be because that takes some high-level math. It does, of course, but other folks have solved that problem and are sharing that solution for free.

I trade options around my long positions. I am always looking for ways to automate those trades without giving up too much to the spread. I'm happy to talk strategies and tactics here.

What are you trying to do? Sounds like we might be able to share information.

[netwrangler]

You can calculate what the options price for American style options should be for a particular strike, underlying, and time, using the Cox, Coss, and Rubinstein Binomial Tree. You can also use the Black-Scholes model for European options.
Here's a link for a Binomial Tree Calculator from my Aussie friend Pete Hoadley
http://www.hoadley.net/options/binomialtree.aspx?tree=B

Here's a calculator for the Black-Scholes model
http://www.numa.com/derivs/ref/calculat/option/calc-opa.htm

By using the calculators you can set limit buys for the options contracts.
Good LuckAiki, incredibly helpful as ever, has provided some key links to option value calculators.

BTW: Aiki, do you actually know Hoadley? If so, give him my thanks the next time you see him. I think his software is great!

[aiki14]

Aiki, incredibly helpful as ever, has provided some key links to option value calculators.

BTW: Aiki, do you actually know Hoadley? If so, give him my thanks the next time you see him. I think his software is great!

Thanks will do. He's a former Microsoft guy, amazingly generous.

[Greyzy]

But, let me beg the question?

Why do you want to avoid "making an estimation of what the price of the option might be once the stock reaches a certain price." I mean, I can think of several reasons for not wanting to do that; but I can think of other reasons to go ahead and make the estimate. Allowing the use of an estimated option price can increase your choices in setting up alerts.

...

I trade options around my long positions. I am always looking for ways to automate those trades without giving up too much to the spread. I'm happy to talk strategies and tactics here.

What are you trying to do? Sounds like we might be able to share information.

Netwrangler & Aiki,

first of all thanks for your helpful replies!

You asked what I am trying to do, so let me give you a bit of background information. I've been investing in stocks and "playing" around with options for about 20 years, but never done that seriously. I also only "traded" in Germany and German stocks only. Since about a year I've been reading a lot about technical analysis especially chart patterns on a daily & weekly scale. I put what I learned and my own ideas into a self-written program that will look for patterns, evaluate them and aid me in setting stops for entry/exit. I'm currently testing it on historical data of the stocks in the S&P 500. If it works the way I expect it to, I plan on trading options instead of the stocks itself.

Now to the origin of my question: I have not yet examined how the correlation of near-money options is with the underlying stock. I'm not afraid of doing some math, but I AM afraid of not getting in or out of the option when my "system" tells me to. Let me give you an example:

I want to buy when the stock makes a pullback from 25,00$ to 24,50$. If that pullback occurs the following day, but lasts only for a few minutes (let's assume 30 minutes), what will happen to the option? Will the price of the option also drop during that period? How low will it drop?

As I said: I haven't looked into the American option market yet.

What is your experience? Do the options behave according to the mathematical models that Aiki named? What about options with a duration of 3 to 9 months? Is there enough trading going on to let the option "follow closely" the price of the stock? Is that true for options on ALL stocks in the S&P 500 or just the BIG ones?

That's why I got the idea of triggering the option trade by the underlying stock.

I'm looking forward to your comments! :wink:

[netwrangler]

Netwrangler & Aiki,

first of all thanks for your helpful replies!

You asked what I am trying to do, so let me give you a bit of background information. I've been investing in stocks and "playing" around with options for about 20 years, but never done that seriously. I also only "traded" in Germany and German stocks only. Since about a year I've been reading a lot about technical analysis especially chart patterns on a daily & weekly scale. I put what I learned and my own ideas into a self-written program that will look for patterns, evaluate them and aid me in setting stops for entry/exit. I'm currently testing it on historical data of the stocks in the S&P 500. If it works the way I expect it to, I plan on trading options instead of the stocks itself.

Now to the origin of my question: I have not yet examined how the correlation of near-money options is with the underlying stock. I'm not afraid of doing some math, but I AM afraid of not getting in or out of the option when my "system" tells me to. Let me give you an example:

I want to buy when the stock makes a pullback from 25,00$ to 24,50$. If that pullback occurs the following day, but lasts only for a few minutes (let's assume 30 minutes), what will happen to the option? Will the price of the option also drop during that period? How low will it drop?

As I said: I haven't looked into the American option market yet.

What is your experience? Do the options behave according to the mathematical models that Aiki named? What about options with a duration of 3 to 9 months? Is there enough trading going on to let the option "follow closely" the price of the stock? Is that true for options on ALL stocks in the S&P 500 or just the BIG ones?

That's why I got the idea of triggering the option trade by the underlying stock.

I'm looking forward to your comments! :wink:Greyzy, those are very insightful questions!

But first, let me extend a hearty welcome to you on this forum. You are off to a great start.

Here is a laundry list of experiences and observations that relate to your questions:

There is a huge difference between options that are thinly traded and options with an active market. In general, I avoid thinly traded options unless I am selling covered calls against a long-term long position in a stock.


Option price changes tend to lag stock price changes intraday. They do follow, but not nearly as quickly as you would expect from the models.


Sharp price changes increase volatility. That, in turn, increases the price of all options. I have seen call premiums increase on price declines and put premiums increase on price increases. That is volatility in action.


The Black-Scholes pricing model is the one I use the most because, in my software, it is only a right-click away. Technically, Black-Scholes applies to European options. The Binomial model is actually more accurate for American options because those options can be assigned at any time prior to expiry. For a quick 'feel' of the stock/option price relationship, however, either model will do.


Neither model factors in investor sentiment or the tactics of the market makers. When stock prices change rapidly, the option bid/ask spread widens. That is when the investors want to buy or sell. That is when the market makers turn a profit.


A buy or sell order based on a change in the price of the stock has a good chance of being executed when spreads have widened. With a market order, you always get the wrong end of the spread. Because of this, I try to avoid market orders.


I do use stock prices in alerts to let me know that something might be happening to the option price; but I consider the relationship between stock and option prices as somewhat loose.


Thus I use stock price to get me to the ball park [soccer pitch?], but I use the option price to figure out how I want to score. When a stock price alert wakes me up, I'll consider setting limit orders based on option prices. Usually, they will be day orders, but Good-'till-Canceled orders work for EOD trading.


With the limit orders, I try to lead the target. Conceptually, I think of it as setting out a line of traps. If I catch something I'm happy. If I don't, there's always another trading opportunity tomorrow.

There's a start. Please let me know what you think. I love this subject.

[Greyzy]

netwrangler,

thanks for your hearty welcome and your answers, too! :itsme:

I do have a couple of follow up questions to what you wrote, but in the best interest of all forum members I will post them as separate threads, so that everybody can find and join the various topics based on the title.

But getting back to THIS topic: option order based on stock price possible???

OptionsXpress offers the so called OTO-order (one-triggers-other). So I thought of entering:
1. a limit order to buy ONE share of the underlying stock
2. a market order to buy the OPTIONS to be trigger by order #1
That should get me into (or out of) the option based on the stock price.

Comments?

[netwrangler]

netwrangler,

thanks for your hearty welcome and your answers, too! :itsme:

I do have a couple of follow up questions to what you wrote, but in the best interest of all forum members I will post them as separate threads, so that everybody can find and join the various topics based on the title.

But getting back to THIS topic: option order based on stock price possible???

OptionsXpress offers the so called OTO-order (one-triggers-other). So I thought of entering:
1. a limit order to buy ONE share of the underlying stock
2. a market order to buy the OPTIONS to be trigger by order #1
That should get me into (or out of) the option based on the stock price.

Comments?I'm not an OptionsXpress client, although I have heard god things about them. I'd like to know more.

That doesn't address my basic problem with your desire to base an option trade on the price of the underlying stock price. To recap:

Submitting a 'market' order on an option based upon the price of the underlying stock is likely to give you a poor execution price.
Submitting a 'limit' order for the option will usually give you better execution.
The best alternative [imo] is setting an 'alert' that tells you about the change in the price of the underlying stock and allows you to set up a trading strategy for the option in real time.

Anyway, happy to follow you to other threads. You ask interesting questions.

[Greyzy]

That doesn't address my basic problem with your desire to base an option trade on the price of the underlying stock price. To recap:

Submitting a 'market' order on an option based upon the price of the underlying stock is likely to give you a poor execution price.
Submitting a 'limit' order for the option will usually give you better execution.
The best alternative [imo] is setting an 'alert' that tells you about the change in the price of the underlying stock and allows you to set up a trading strategy for the option in real time.


First, let me explain "my desire to base an option trade on the price of the underlying stock price": I'm working on a system that generates signals for trades based on daily/weekly candlesticks. I would be holding the stock/option anywhere from a few days (typically get stopped out during that period) to a few weeks (if the initial stops aren't hit and the trade works). Why is this important? Because:
1. I don't trade intraday (I have a job during the market hours), so I cannot fine tune my trades manually.
2. I need the stock to make moves bigger than 5% (ideally 10% and more) during the mentioned time frame. A few ticks more or less when buying/selling the options shouldn't matter much, so I think fine tuning isn't vital.
3. My system (which includes stops to get out, but also to get IN) is based on the data of the stock. I don't know from that data (open/high/low/close) how long the stock was at a certain price. All I know (and my system can take into account) is the fact that a certain price was hit. And therefore it can tell me to get in (or out) at a specific price OF THE STOCK as the optimal point. That's when I want to pull the trigger. Not higher, not lower.

An 'alert' won't do, because I am away from the market. :ciao:

A limit order might not be filled. :mad2:

Are there any other alternatives??? I don't know of any. :dontknow:



Second, I'd like to better understand why "a 'market' order on an option ... is likely to give you a poor execution price."

Let's say the current prices are (bid/ask) 2,05$/1,95$. If I place:
a) a market order to BUY it should get filled, presumably at 2,05$. Am I correct? Or does it happen (often) that I will have to pay a higher price (if so, would that be something like 2,07$ or rather like 2,17$)?
b) a limit order to BUY at 1,99$ it would NOT get filled, would it?

How would your order look like if you would be trading on my time scale (please remember, IMHO getting in or out 'for sure' should be more important than a few ticks more or less)?

I hope my questions don't sound too weird to you! :confused2:

[netwrangler]

First, let me explain "my desire to base an option trade on the price of the underlying stock price": I'm working on a system that generates signals for trades based on daily/weekly candlesticks. I would be holding the stock/option anywhere from a few days (typically get stopped out during that period) to a few weeks (if the initial stops aren't hit and the trade works). Why is this important? Because:
1. I don't trade intraday (I have a job during the market hours), so I cannot fine tune my trades manually.
2. I need the stock to make moves bigger than 5% (ideally 10% and more) during the mentioned time frame. A few ticks more or less when buying/selling the options shouldn't matter much, so I think fine tuning isn't vital.
3. My system (which includes stops to get out, but also to get IN) is based on the data of the stock. I don't know from that data (open/high/low/close) how long the stock was at a certain price. All I know (and my system can take into account) is the fact that a certain price was hit. And therefore it can tell me to get in (or out) at a specific price OF THE STOCK as the optimal point. That's when I want to pull the trigger. Not higher, not lower.

An 'alert' won't do, because I am away from the market. :ciao:

A limit order might not be filled. :mad2:

Are there any other alternatives??? I don't know of any. :dontknow:



Second, I'd like to better understand why "a 'market' order on an option ... is likely to give you a poor execution price."

Let's say the current prices are (bid/ask) 2,05$/1,95$. If I place:
a) a market order to BUY it should get filled, presumably at 2,05$. Am I correct? Or does it happen (often) that I will have to pay a higher price (if so, would that be something like 2,07$ or rather like 2,17$)?
b) a limit order to BUY at 1,99$ it would NOT get filled, would it?

How would your order look like if you would be trading on my time scale (please remember, IMHO getting in or out 'for sure' should be more important than a few ticks more or less)?

I hope my questions don't sound too weird to you! :confused2:You ask two very good questions. For this post, I'll try to answer the second one, since I think that is the easier one to address.

Consider the following scenario:

The CVX PPS is $84.50
The MAR 85 call spread is 2.45x2.65 [2.55 avg]
The implied volatility is 22.55

then

The CVX price increases to $92.50, which is your trigger point
The MAR 85 call spread becomes 7.10x8.10 [7.60 avg]
the implied volatility has decreased to ~16.55

Two factors have gone against you.

The option price increase is lagging the stock price increase. This is reflected in the decrease in implied volatility.
The average of the bid/ask has increased from 2.55 to 7.60 or 198%, but the spread has increased from $0.20 to $1.00 or 400%. This reflects the market makers need for a higher spread when prices change.

When the dust settles, and the price stabilizes at $92.50, it might be reasonable to expect a spread of 7.70X8.30 for the option, which would be based on the original implied volatility and be a proportional increase in the spread. But that doesn't matter. You put in a market order when the stock hit $92.50. You sold at $7.10, or $0.60 below the [soon to arrive] 'stabilized' price.

Now, I chose the numbers for this example, so it shouldn't be surprising that the numbers back my thesis. What I suggest, however, is that the numbers I chose are not unreasonable.
When you trigger a market order on a call option based on an increase in the price of the underlying security, you risk selling the call at a low price because

The bid/ask average price lags the stock price
The spread increases, lowering the bid price still further.

By using a limit order for the call, you give the option price a chance to catch up with the stock price. In the example I gave, the difference would have been $0.60, which is 8.45% above the $7.10 price realized with a market order, or an additional 22.64% return on the original $2.65 ask.

Granted, these differentials don't occur all the time. If you have a gradual increase, the price lag and spread differential are less pronounced. But something like this doesn't have to happen often to really tick you off.

In my view, the better strategy is a limit order on the option at $7.10.
But what if the limit order on the option doesn't trigger?
...Fair question.
......But what if the limit price on the stock doesn't trigger?
.........An even fairer question.
If you set the stock price trigger high enough to compensate for the price lag and spread differential associated with a rapid price movement, you could miss the opportunity to sell the option at your desired price if a more gradual increase in the stock price occurs.

In my view, basing the sale of the option on the stock price just introduces another layer of complexity and uncertainty into the trade. You're better off entering a limit order based on the option price — after all, this is what you are selling.

And all that said, here is the counter example:
You are about to go on a two-week vacation to Colorado, where you will be bagging thirteen 14ers in thirteen days. You are not spending time in internet cafés. The time value of your call will be decreasing with every peak you climb. So, base your order on the stock price, and accept the market price on the option.

Course, 'twere me, I'd think long and hard about closing the position before I headed for the hills, so to speak. ;)

[netwrangler]

First, let me explain "my desire to base an option trade on the price of the underlying stock price": I'm working on a system that generates signals for trades based on daily/weekly candlesticks. I would be holding the stock/option anywhere from a few days (typically get stopped out during that period) to a few weeks (if the initial stops aren't hit and the trade works). Why is this important? Because:
1. I don't trade intraday (I have a job during the market hours), so I cannot fine tune my trades manually.
2. I need the stock to make moves bigger than 5% (ideally 10% and more) during the mentioned time frame. A few ticks more or less when buying/selling the options shouldn't matter much, so I think fine tuning isn't vital.
3. My system (which includes stops to get out, but also to get IN) is based on the data of the stock. I don't know from that data (open/high/low/close) how long the stock was at a certain price. All I know (and my system can take into account) is the fact that a certain price was hit. And therefore it can tell me to get in (or out) at a specific price OF THE STOCK as the optimal point. That's when I want to pull the trigger. Not higher, not lower.

An 'alert' won't do, because I am away from the market. :ciao:

A limit order might not be filled. :mad2:

Are there any other alternatives??? I don't know of any. :dontknow:
About the only alternative I can think of is to enter two orders — a conditional order based on the stock price and a limit order based on the option price. Each order should be to be "sell all". Obviously, this only works for getting out.

You don't say, but I figure you want to trade the option rather than the stock for leverage.

[Greyzy]

You don't say, but I figure you want to trade the option rather than the stock for leverage.

Yep, but it's not "just" for leverage in terms of increasing (potential) profits. I also want to limit my exposure and cap my risk on the downside. I want to use a stop-loss on the option still, but if things go REALLY bad, I won't lose more than what I paid for the option and won't take the full ride like when I own the stock. Also going short is possible for me by buying puts, because selling stocks short is beyond my reach.

Limiting my exposure means that each trade is rather "small" in terms of absolute $. This allows me to diversify my limited capital (in terms of stocks and also in terms of long/short mix). It also keeps variance down, meaning that one single trade (good or bad) won't have a big effect on my long term result.

[netwrangler]

Well, it is a wonderful thing for me to find that I am not too old to learn.

I have little 'side project' going looking at different trading platforms. It's not that I don't like Schwab. It's just that I want to see what other bells and whistles the other trading platforms offer.

Currently, I am testing ThnikorSwim. This is the platform that was rated #1 in Barron's annual survey. I can see why. The platform gives you access to access to a vast amount of information, gives you many tools with which to evaluate that information, and then gives you more ways than most platforms do to place your order.

In particular, you can place a sell order for an option, and have that order be contingent on the bid of the underlying stock reach a certain level.
That, I believe, is a 'QED' answer to your original question.

But beyond that, ThinkorSwim [TOS] lets you enter a pair of OCO orders. OCO stands for 'One Cancels the Other'. With OCOs, you could enter a sell order that is triggered by the stock price, and another sell order that is triggered by the option price. Whichever order fired first would cancel the other.
So if the stock price went up, you would be covered.
But if the option price went up to your exit target, you would be covered as well, regardless of what the stock price did.

TOS is definitely not for the lazy trader. As is common with computer software packages, the more options the software gives you, the higher the learning threshhold to become 'comfortable' using the application.
That said, I think TOS does a great job of combining a well designed user interface, gobs of functionality, and 'training' modules that will get you up to speed — assuming you are up for paying attention for 10-20 minutes at a time.

I'm still in mid-evaluation here. But I wanted to take a break and note that, it appears, I did find a platform that can do what the OP asked.

Live and learn. 8O