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Lesson 10 - Conditional Orders

by Uncle Bob Williams

Trade Monitor Checklist - Suggested Conditional Orders

The Trade Monitor includes Suggested Conditional Orders for each strategy type. If we are not able to constantly monitor the Market and our Options positions, it is strongly recommended to have conditional orders live in the Market in case there is a sudden market movement. The placement of conditional orders is a balancing act. We want the conditional orders to be far enough from the current price of the underlying so it can oscillate up and down in a normal pattern without triggering a closing order on our positions, yet we don't want the conditional order to be too far away that we would suffer a significant loss if the Market moves aggressively. Our suggestions here are on the more aggressive side to protect against a large Market movement, yet each Investor can adjust those according to their trading style.

Conditional Orders Butterfly, Calendar and Double Diagonal Strategies:

Conditional orders should be placed at the expiration break-even points.

Since we will be entering 2 different conditional orders, one for the down-side break-even point, and one for the up-side break-even point, we want to put in both orders together as OCO (One Cancels the Other).

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Example for a Conditional order to close a Calendar trade.

We have a Calendar on Acme:

=> Current price of Acme (underlying) is 100

=> Our Calendar spread:

SOLD 1 | ACME | JUNE | 100 | CALL

BOUGHT 1 | ACME | JULY | 100 | CALL

=> break-even  down-side: 90

=> break-even  up-side: 110

Conditional Order as follows:

STEP A) Select "Advanced Trade": OCO (One Cancels the Other). This is critical, because if one of the trades is filled, we don't want the other trade to stay live: it could create a new 'reverse Calendar' position which we do not want. As soon as one of our conditional orders is filled, the OCO setting will automatically cancel the other conditional order.

STEP B) Down-side break-even:

=> Select the Calendar Trade, and create a 'closing order'. (You can manually select the opposite spread to close the position if your Broker doesn't have the 'closing order' possibility.)

=> Time in Force: GTC (Good 'Til Cancelled)

=> Price Rules: Market (We don't want to set a limit price, because we don't know what the pricing will be and we want to close this position if the underlying hits our break-even point.)

=> Submit at Specified Market Condition: When the "MARK" of the Underlying is "AT OR BELOW" price of "90"

Your broker will describe this trade as:

1. Wait until the following condition is satisfied: mark price of the security is less or equal to 90.00. This order will show a WAIT COND status during waiting;

2. Submit the following order: SELL -1 CALENDAR ACME JUN/JUL 100 CALL at current market price. The order is valid until it is either filled or cancelled;

STEP C) Up-side break-even:

=> Select the Calendar Trade, and create a 'closing order'.

=> Time in Force: GTC (Good 'Til Cancelled)

=> Price Rules: Market

=> Submit at Specified Market Condition: When the "MARK" of the Underlying is "AT OR ABOVE" price of "110"

Your broker will describe this trade as:

1. Wait until the following condition is satisfied: mark price of the security is more or equal to 110.00. This order will show a WAIT COND status during waiting;

2. Submit the following order: SELL -1 CALENDAR ACME JUN/JUL 100 CALL at current market price. The order is valid until it is either filled or cancelled;

STEP D) Confirm that the trade was entered correctly, and submit the trade.

We now have a conditional order that will close our Calendar trade if the underlying price hits our break-even point, and when the closing trade is filled, it will automatically cancel the other conditional order.

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Conditional Orders Condor Strategy:

Conditional orders for a Condor depend on the comfort level of the Investor. The Delta of the Short Strike is both a key factor in the decision to enter a Condor trade and determining a conditional order or exit point for a Condor.

Low Prob Condors are for Advanced Traders who can more closely monitor the Market movements. It is possible to place conditional orders to protect against a large loss on a Low Prob Condor, but it is a more complex calculation than is appropriate for this book. However, that doesn't mean we would leave a Low Prob Condor open on the market without any conditional orders. At a minimum, we would put a conditional order to close the position when the market hits the Short Strike of our position.

High Prob Condors are easier to manage. It is possible to determine appropriate conditional orders in advance based on the comfort level of the Investor. The Advanced view of the Trade Finder shows the "Estimated Index Value for Delta of Short" as pictured below:

Current price of the underlying: 845.23

Short Strike of the Condor on the top line: 740



This shows us the approximate points where we should place our conditional orders. Remember that for a High Prob Condor, we enter the trade when the Delta of our Short Strike is between 7 to 9 (More accurately represented as: .07 to .09).

A more conservative investor will place a conditional order for a High Prob Condor at the point when the Delta of the Short Strike has risen to 16 (0.16). In the example above, it means that the price of the underlying has moved from 845.23 when we started down to 808.

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Example of a Conditional Order using the Delta of the Short Strike of 16 (Underlying price would be 808) as follows:

STEP A) Select "Single Order"

STEP B) Delta:

=> Select the Condor Trade, and create a 'closing order'. (You can manually select the opposite spread to close the position if your Broker doesn't have the 'closing order' possibility.)

=> Time in Force: GTC (Good 'Til Cancelled)

=> Price Rules: Market (We don't want to set a limit price, because we don't know what the pricing will be and we want to close this position if the underlying hits our break-even point.)

=> Submit at Specified Market Condition: When the "MARK" of the Underlying is "AT OR BELOW" price of "808". The trigger is the price of the Underlying when the Delta of our Short position reaches our exit level.

Your broker will describe this trade as:

1. Wait until the following condition is satisfied: mark price of the security is less or equal to 808.00. This order will show a WAIT COND status during waiting;

2. Submit the following order: BUY +1 VERTICAL RUT JULY 740/730 PUT at current market price. The order is valid until it is either filled or cancelled;

STEP C) Confirm that the trade was entered correctly, and submit the trade.

NOTE: If we decide to manually exit positions, we must first cancel ALL conditional orders that we placed on those positions.
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More aggressive investors will be willing to let the underlying get closer to their Short Strike before exiting their positions. On the Trade Finder Advanced Tab we show the approximate price of the underlying for when the Delta of the Short Strike would be 16, 20, 25 and 30. These numbers are among the more common exit points. On the Trade Monitor page we provide the values for a Delta of 16 and a Delta of 30, which cover most people: the very conservative and the more aggressive investors.

It is important to note that there are investors who will hold on to their High Prob Condor positions until the underlying hits their Short Strike position. The problem with this strategy is that the market can and will eventually hit the Short Strike of a High Prob Condor and the cost to exit the position can be more than 4 times the original credit taken in on the trade. This means it can take 4 to 6 months of profitable trades to make up for that one loss.

We strongly believe in smart Options Investing to make consistent profits, and that is why we suggest exiting early with a more conservative approach. The more conservative approach limits losses and capitalizes on the successful trades so we can have more consistent profits.

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