Stop market order for options
A stop market order, also known as a stop-loss, triggers a market order if the option price falls to your stop price. You can use this order type to manage your risk exposure, maintain disciplined exit strategies, and auto-respond to sudden market shifts.
The difference between a stop market and a stop-limit appears when the option price hits the stop. With a stop market, the order becomes a market order. With a stop-limit, the order becomes a limit order. The implications of becoming a market order versus a limit order can be significant.
The stop price of a sell order needs to be below the current market price. Otherwise, it would immediately trigger and become a market order.
Elevated volatility can affect most order types, but can be especially impactful on market or stop market orders. Market orders are filled at ‘the next available price’, thus between the time the order is entered and executed, volatility may have caused the price to rapidly get to a level that was not anticipated. Since the market order must be executed at the potentially disadvantageous price, this can lead to reduced gains or increased losses compared to what was expected when the order was entered.