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.

Sell stop market order

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.

Stop price does not guarantee execution price. A “stop order” becomes a “market order” when the “stop price” is triggered, and firms are required to execute a market order fully and promptly at the current market price. Therefore, the price at which a stop order ultimately is executed may be very different from the investor’s “stop price.”

Stop orders may be triggered by a short-lived, dramatic price change. During periods of volatile market conditions, the price of a security (e.g., the price of a stock or an option) can move significantly in a short period of time and trigger an execution of a stop order (and the security may later resume trading at its prior price level). Investors should understand that if their stop order is triggered under these circumstances, they may sell at an undesirable price even though the price of the security may stabilize during the same trading day.

Sell stop orders may exacerbate price declines during times of extreme volatility. The activation of sell stop orders may add downward price pressure on a security. If triggered during a precipitous price decline, a sell stop order also is more likely to result in an execution well below the stop price.

Placing a “limit price” on a stop order may help manage some of these risks. A stop order with a “limit price” (a “stop limit” order) becomes a “limit order” when the stock reaches the “stop price.” A “limit order” is an order to buy or sell a security for an amount no worse than a specific price (i.e., the “limit price”). By using a stop limit order instead of a regular stop order, a customer will receive additional certainty with respect to the price the customer receives for the stock. However, investors also should be aware that, because brokers cannot sell for a price that is lower (or buy for a price that is higher) than the limit price selected, there is the possibility that the order will not be executed at all.