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]

Originally Posted by 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!

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/calcu...n/calc-opa.htm

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

[netwrangler]

Originally Posted by 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!

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]

Originally Posted by aiki14

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/calcu...n/calc-opa.htm

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

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!

[aiki14]

Originally Posted by netwrangler

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]

Originally Posted by netwrangler

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!

[netwrangler]

Originally Posted by Greyzy

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!

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!

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]

Originally Posted by Greyzy

netwrangler,

thanks for your hearty welcome and your answers, too!

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.