Why should I set a stoploss using GTT when buying stock or index options
Why Should I set a Stoploss Using GTT When Buying Stock or Index Options?
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.
What is GTT?
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.
How Does GTT Work?
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.
Why Should You Place a GTT Order?
Here's why you should consider placing a GTT order:
1. Mitigate Losses
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.
2. Peace of Mind
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.
3. Customization
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.
How can you Place a GTT Order?
The following steps can help you place a GTT order on most brokerage platforms:
- Choose the Stock or Index Option: Select the specific stock or index option you want to trade.
- Set Trigger Condition: Determine the trigger condition for your GTT order. This can be a specific price level or a technical indicator that you believe is significant.
- Set Stoploss Price: Define the stop-loss price at which you want your GTT order to be executed.
- Choose Order Type: Select the order type as GTT and enter the relevant details, including the quantity and validity period of the order.
- Place the Order: Review the order details and confirm the placement of the GTT order.
Why Should you set a Stoploss Using GTT While Buying Stock or Index Options?
Setting a stop-loss using GTT is particularly important when buying stocks or index options because:
1. Limits Potential Losses
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.
2. Protect Gains
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.
The Bottom Line
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.
Related Articles: Understanding order types and margining in commodities | When to use market orders and when to use limit orders | Understanding the nuances of smart order routing
