My favorite order is any order that closes a profitable position at my planned profit target. However, this article addresses my second-favorite type of order: the contingent or conditional order. Even full-time traders must sometimes leave their trading desk. Even traders who can typically trust themselves to act when they need to act can have that occasional day when they know they'll be fielding phone calls or otherwise be distracted. Contingent or conditional orders prove their worth on these types of days.
I typically adjust my preferred trade about one hour to thirty minutes before the close. Imagine that on June 4, I was going to leave my trading desk at noon and would not have had the ability to check my live trade at my typical adjustment time of day. On that day, the end-of-day adjustment would be coming after the 2:00 pm ET release of the Beige Book. The RUT, the underlying for my options position, might move big between that release and the end of day.
My Live Trade, Late Morning on June 4, Graph by OptionNET Explorer:
The RUT price was then centered well under the tent. Deltas, the Greek that measures how much the profit or loss changes with a one-point change in the underlying's price, were a moderate (for the size of the trade) +28.21 deltas. The "today" profit-and-loss line slopes into negative territory more quickly on a drop in price than it does on a rise in RUT price: this is the effect of the positive delta, for those who don't follow Greeks. If I were leaving for the afternoon, I would leave contingent orders to cover both a too-sharp rise and a too-sharp drop in RUT price.
What's "too" sharp? Different traders might answer that question differently. I'm conservative and like my sleep. I try to keep my trade within +/- 5 deltas per butterfly contract. For this trade, that means +/- 60 deltas.
Let's use the possibility of a downside move to estimate when deltas might rise to +60. On OptionNet Explorer, I can scan across the PnL line and a second pull-down menu shows all the Greeks. I can't photograph that, however, as the second pulldown menu disappears when I attempt to snap the chart. For this reason, I'll use a think-or-swim chart. For those subscribers who don't know about the Greeks or care about them, you would just scan across a PnL line on your brokerage's version of an expiration chart and determine when the profit or loss gets high enough that you want to make an adjustment and flatten that PnL line.
TOS's Version of My Live Trade, Third "Price Slice" Showing Point where Delta rises to about +60:
The point when deltas would rise to my adjustment point would be at about 1121.63 or a little below that. That's shown on the third "Price Slice," at about 1121.63, although the width requirements of the graph for publication squeezes the price to "1121." A vertical red line is also drawn on the graph at 1121.63.
Therefore, in our imagined scenario in which I'm going to be away from my trading desk and not able to access my mobile trading platform, I would want to set a contingent order to lower deltas somewhere near 1121.63 or a little below that. What I would probably do to decrease the deltas is to sell one of my call debit spreads. For example, I could sell one of my JUN14 1110/1130 call debit spreads and reduce the positive deltas by 17.31 deltas.
Once you've created an order on TOS, the order creation page features a little blue gear on the far right-hand side of the order. Clicking that gear returns an "Order Rules" page. I can set up those Order Rules to meet my specifications.
Example of Order Rules Setup for a Contingent or Conditional Order:
This order rules page shows that I have the trigger to submit the trade set when the RUT moves to or below 1121.20, a "little below" 1121.63. When that trigger is hit, the trade to sell my call debit spread, described as a "vertical" near the top of the page, will be submitted. The order will be set to sell that spread at a limit price that is equal to the mark or mid-price between the bid and the ask minus 15 cents. I wouldn't always set that price to be submitted at 15 cents below the mid-price or mark.
Lately, however, it's been difficult during volatile times to buy or sell call debit spreads at the mark. That's the reason for the 15-cent offset in current market conditions when submitting a conditional or contigent order. If I were at my trading desk and working the order, I'd try it at the mid-price and then work the price away from the mid-price if it didn't fill.
However, in this imagined scenario, I will want to sell that call debit spread but not yet be desperate to do so. A study of the graph shows that the trade wouldn't yet be in deep trouble. I set this example contingent order so that I'll accept that 15 cents less than the mark or mid-price. If I thought I would be desperate to sell and wouldn't be there to work the order, I'd probably put in a different contingent order, perhaps being willing to accept 20 or 25 cents below the mark or mid-price.
In neither case is it guaranteed that my order would be filled, however. That's the risk I take with these contingent orders set up this way. When we could still route our RUT complex orders through ISE and there was more volume, the offset would probably have been less than it would have been on this date.
I could have set several such orders to fire at several RUT price points in case the RUT dropped sharply in the afternoon. I would have also set orders for the contingency that the RUT was going to climb rapidly. Those orders likely would have been to buy more call debit spreads. Those would have been set so that I was willing to pay more than the mark or mid-price.
Fortunately, I was able to watch the markets that afternoon and react in real time. Because contingent or conditional orders allow me to cover this type of situation when I might not be available, however, they're one of my favorite type of orders. They give me freedom to make appointments that take me away from the markets. If I'm under the weather or fielding too many calls to make sound and timely decisions, they can be set to fire even when I'm at my desk. That means that unless I'm going to be on vacation or otherwise away for a long period of time, I can still trade regularly.
Think-or-swim's contingent orders are particularly flexible, but many or perhaps most brokerages have some type of contingent or conditional orders. It must be acknowledged, however, that all brokerages have pros and cons, and TOS certainly balances these flexible contingent or conditional orders with some cons. Not all brokerages have contingent orders this flexible, so check with the trading desk on your preferred platform to see what conditions or contingencies you can build into your orders on that platform.
Some of you will have noticed, too, that TOS deltas were much different at the then-live position on TOS than had been visible on OptionNet Explorer. The two platforms used to track each other, and both tended to be a little too positive delta. However, since a TOS upgrade in early April, these two no longer track each other as well. Since all my backtesting was done on ONE, I still use ONE's figures. That means in real life, I would have used ONE to set up the levels at which my contingent trades were to be triggered on TOS.