In options, when a stop is set to protect, what triggers the stop? Is it the bid or the ask? (November 21, 2000)
As a stop order is a sell-side transaction, the option price must hit the bid side of the spread to trigger a sale. Further, there must be a trade made at that level to trigger the stop order. That is why we like to trade options that have at least 100 open interests as there is a better likelihood of trades at many prices, giving a better probability that a trade at our stop price will be made, thus activating our stop order. When we trade options with few open interests, we have to keep abreast of the action or give our brokers specific instructions about at what price to sell.
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