The Option Alpha Podcast 14: Why "Stop-Loss" Orders Could Actually Be Creating More Losing Trades
Jan 3, 2015
This podcast challenges the belief that stop-loss orders help manage risk, showing how they actually create more losing trades. The speaker introduces the Lazy Trader Program and discusses the psychology behind stop-loss orders. They analyze trading opportunities in GoPro and GLD stocks, emphasizing the importance of probabilities and holding trades through expiration. A new strategy for exiting trades based on waiting for profits is introduced.
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Stop-Losses Inflate Realized Losses
- Stop-loss orders on option credit spreads often trigger during temporary moves and create more realized losses.
- Probability-to-touch is higher than probability-to-close, so stop-losses cut winners prematurely.
The 'Lazy Trader' Example
- Kirk describes the 'Lazy Trader' approach: enter high-probability trades and seldom touch them until expiration.
- He claims you can be mostly passive and still achieve consistent long-term profits if entries are correct.
Touch Probability Versus Expiration Probability
- Probability a strike will be touched before expiration is much higher than the probability it will finish in the money.
- That gap explains why many stop-loss users get stopped out even though the trade would have won by expiration.