Buying options carries significant risks and can jeopardise your entire invested capital. The value of option premiums can rapidly decline depending on various factors that affect prices. Without proper risk management, you may face substantial losses.
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You can protect your capital from excessive losses by employing a stop loss when buying options. To understand the importance of this risk management technique and how to implement it effectively, read this article until the end.
GTT stands for Good Till Trigger. It is an order type offered by various brokerage platforms that allows you to place an order to buy or sell a stock or index option with predefined conditions. These conditions can include a specific trigger price, target price, or stop-loss price.
When you place a GTT order, it remains active until triggered or cancelled. The trigger condition can be set based on the price movement of the stock or index option. Once the trigger condition is met, the GTT order gets converted into a limit order, which is then executed by the exchange.
Here's why you should consider placing a GTT order:
Setting a stop-loss using GTT helps protect your investments by automatically selling the stock or index option if it reaches a predetermined price level. This prevents substantial losses in case the market moves unfavorably.
With GTT orders, you don't have to monitor the market constantly or be glued to your trading terminal. Once you set your trigger and stop-loss prices, you can have peace of mind knowing that your order will be executed automatically if the conditions are met.
GTT orders allow you to customize your trading strategy by setting specific trigger and stop-loss prices that align with your risk tolerance and investment goals. You have control over when and at what price your order gets executed.
The following steps can help you place a GTT order on most brokerage platforms:
Setting a stop-loss using GTT is particularly important when buying stocks or index options because:
By defining a stop-loss price, you establish a threshold at which your order will be automatically executed, preventing substantial losses if the market moves against your position.
If the market is favorable and your investments have generated profits, setting a stop-loss using GTT allows you to secure those gains by locking in a selling price at a predetermined level.
Buying stock or index options can be risky, but implementing proper risk management strategies can mitigate potential losses and protect your capital. Setting a stop loss using GTT (Good Till Trigger) is a powerful tool that allows you to define the predetermined trigger and stop-loss prices for your options trades.