Stop Losing Money on Bad Trades

Options Trading Can Destroy Your Account — Here’s How to Set a Stop Loss on Robinhood

A simple step-by-step guide to setting stop losses on Robinhood options to protect your capital and minimize risk

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If you’ve ever tried to set a stop-loss in Robinhood on an options trade, you’ve probably realized you only have one choice: a premium-based stop.

Nothing in Robin Hood allows you to trigger a stop-loss based on the underlying stock or ETF price.

And if you don’t understand how premium moves, you can easily get stopped out way earlier than you intended.

So, in this story, I want to show you exactly how stop-loss orders work on Robin Hood for options, what types of orders you have available to you, what you can’t do on Robin Hood, how it works on the desktop platform and Robin Hood Legend, and an example.

Let’s jump right into it.

So, before we place a stop-loss order on Robin Hood, we need to know what the platform is actually capable of.

So, I want to outline that really quickly.

So, you can set a stop-loss based on the premium of the option contract you’re trading.

You can set a stop limit order.

You can set a limit sell order, whether it’s a stop-loss or technically it could be a take-profit order.

And you can set price alerts on the underlying stock.

Robin Hood cannot trigger a stop based on the underlying stock or ETF price, set OCO or one cancels the other brackets, automate exits using conditional logic, and prevent slippage in fast-moving or highly volatile markets.

So everything is really just tied to the option premium and not the specific levels of the underlying stock.

All right, so I got an example up on the screen right now.

This is an option contract that I just bought about 20 to 30 minutes ago, before I made this story. So I can show you the example.

I’m assuming if you’re reading this story on stop losses, you probably know how to buy an option contract.

And I’ve got a story from way back in the past, going over how all this stuff. So, if you ever want to check things out, I’ve got a ton of playlists that dive deeper.

But what I did also cover in a prior story was really talking about options, stop losses in general, not just Robin, not just any other platform.

And what I dive deep into is premium-based versus underlying-based, time-based stops, how premiums move, and we cover it more into why you would want to use a certain method or not.

So, that story could be really, really helpful if you’re still confused on premium-based versus underlying-based versus like saying things like conditional logic.

That’s kind of more advanced, but we do touch on a lot of that stuff in that story if you’re curious. I’ll link that one up below this one. If not, it’s up on the channel already.

So, let’s go over the basics to closing out a position with a stop-loss order on an option contract.

So, here’s an option contract.

When I’m filming the video, this actually expires today, so it’s like super cheap.

I bought an out-of-the-money contract, but it is also a Fed meeting day. So, we’re gonna get the Fed interest rate announcement.

So, technically, it’s like it’s almost like a lottery ticket.

I’m not actually gonna, well, I guess I could. It’s 10 bucks, 12 bucks, whatever. I could hold it through the expiration.

So, if it goes, great. If it doesn’t go, I lose $11 cuz I bought it for 11. Okay, but for the sake of this story, we see that we now have the option when I click on, and I’ve pulled up the option contract that I own in Robin.

Now, this is on the regular kind of desktop platform.

This would look pretty much the same on your phone or a mobile device. This is just way bigger, so it’s easier to make a story on.

I will show you this in legend in just one second.

So, we’ll come to that.

I’m going to get to that.

Let’s just talk about this here first.

So, we go to sell to close.

And if I hit the drop-down menu, we have a couple of different order types that pop up.

I have a limit order and then a stop limit order.

That’s all I’m going to see inside the desktop platform.

You’re going to see a bit more, or I guess there’ll be some other options on the Legend platform, which we’ll show you in a second.

Click on the number of contracts I have, and set my limit price if I have it set to a limit order.

And this is not going to be a stop-loss. This is just like, okay, I want this to sell at 20 cents.

And I can set it for a time in force today or good till canceled if this doesn’t expire today, and it expires, you know, a couple of days or weeks down the road.

And then that’s it, you know, from 9:30 a.m. until 4 4:15 I guess, P.M. because options now they give you that extra 15 minutes.

You know, I can, you know, let this thing play out, and if it ever hits 20 cents, it’ll take me out.

That’s it. That’s not the stop order we’re looking for.

So, I hit this drop-down, and now I have the option to hit stop limit.

So, now what’s going to happen, it’s going to give me a limit price and a stop price.

If I clear it out, it’ll default to what the current price or the best fill price will be.

But what I want to do first is set a stop price.

So what does this mean? If I set a stop price to let’s say 5 cents when this contract trades at 5 cents, an order goes through at 5 cents, then it’s going to now trigger and tell Robin Hood, okay, we’ve hit the stop, we’ve hit the threshold, now execute this order or send the limit price order live.

So now I can set this limit price to be, let’s say, 5 cents, and as long as I can get filled, there’s essentially a buyer to my sell, I’m going to get filled.

But if this were to drop below 5 cents quickly, we would have a super volatile market.

The market starts crashing, and there’s like no one to buy this.

No one wants to buy this, and now we go to 4 cents, 3 cents, 2 cents until the expiration, it’s possible that I never actually get this limit cell.

It never actually fills.

So that’s the risk with an option order like this.

Now, I could set this to be higher.

I could technically set it to be lower.

It just depends on how you want to play it.

If you want to be super safe, you can set it to even a cent lower than the current price. And if I click on review order, I click on submit.

This is now going to be pending and placed. So, what’s happening here is we get down to that 5-cent threshold, that 5-cent stop-loss, and it will execute or send out a limit order to sell me at 4 cents or better.

You’re not going to get worse.

You’re going to get that price or better, essentially.

So, that’s what that is for, and it could be useful depending upon the situation, but there are some risks to it.

So, I just canceled the order.

I’m going to now go to Robin Hood Legend to show you guys how we can do this with a different kind of perspective or a different view.

So, I’m on legend.

Up in the top right, we have my current position.

Okay, let me get out of this for a second.

So, if I then click on this position and where it says close, I can click on sell to close, and then I have the order type as the next selection.

Underneath this, we see a bit of a different situation.

So I now have the option to do a limit sell, a market sell right now, or a stop market and a stop limit.

The difference here, we just went over the stop limit, but now we have access to a stop market.

A bit of a different order.

If I set my stop price to 5 cents, let’s go 0.05, sorry, and I set it to the good till day or good till cancel, whatever the time frame I’m looking for.

In this case, it expires at 415 today.

So I can leave it alone. But if I set it to 5 cents, what’s going to happen is when we finally hit 5 cents, if we ever do on this option contract, then Robin Hood is going to immediately send out a market sell order.

Okay, which means I could get filled at 5 cents, 6 cents, 4 cents, somewhere in that ballpark, but it’s going to be a market sell.

So Robin doesn’t really care what your order is.

It’s wherever the market is. And if things are super super volatile, it might not be 5 cents.

But in this situation, these contracts are super liquid, which means we’ve got a ton of people trading these things all the time.

The spreads, which means the bid and ask spread, are pretty tight almost all the time. It’s usually about a 1-cent spread, unless the price of the option goes up to, like, you know, multiple dollars.

This probably won’t be a problem.

This is probably fine.

But I just don’t want to say that, okay, if you set a stop limit or a yes, a stop market order at whatever price, you’re going to guarantee that price.

You might not get that price.

It’s again, it’s just going to exit as a market order, which again comes down to when in that super small delay from when the price is triggered that we hit that stop-loss threshold to now, okay, what’s the market currently trading at? And as it could, it could vary in a very volatile manner, depending upon the contracts, how liquid, how wide the spreads are, all of that.

But that’s the options that you have.

So I can click on that and set it to sell.

And now again, if it goes to five, I’ll get sold.

I’ll get taken out at that price.

Click on that sell.

Now, we’ve got a recent order sitting in here.

We can see the one that I canceled before, and this one says it’s working, so I’m good to go.

But there is something we can do a bit more manually that allows us to play based on the underlying price.

So, for example, here’s the daily chart on SPY.

If this were a day trade, I’d probably be looking at more of a 5-minute chart personally, but again, everyone’s different.

And I could say to myself, okay, well, if we drop below the low of the day, then maybe I want to get stopped out.

But there’s no way for me to create that conditional logic, saying if this happens on spy, sell my spy 690 calls, please.

Like that doesn’t exist as of right now.

So let’s say that I wanted to know if the price went below the low of the day, I wanted to get alerted, and I wanted to then go manually close my position.

So go back to this chart right here.

I can click on this little alert icon right now. Click on price alerts. Add alert.

I can even make it for indicators as well. Add an alert.

So I have Spy pulled up.

If the price moves below what was it 6 81 point, let’s just call it 30.

I click on save, and if the price goes below that point, I’m going to be alerted, and then I can go out and close my position.

So this is how I would be able to do kind of like a conditional logic, saying okay, spy if you fall below this level, then I want to exit my option.

I don’t really care about the premium of the option because the premium is going to be volatile.

There are things like time decay.

There are things like implied volatility.

There’s all these things that can kind of throw the ver the the the price of this thing off.

I can’t control.

But I can keep it simple and say, " Hey, if the price falls below this point, I want to get out.

And that’s it.

Now, what I would recommend if you do something like this, I would recommend you utilize something like Tradezella, where you can track all of your trades, because I’ve been doing this over the past 3 4 years now. And what I’m doing is I’m able to see how all of my trades are stacking up, and then I can tag them.

So, if I go into a specific trade, for example, let’s go into a trade right here.

I can then go into and create custom tags.

In my custom tags, I can make a premium-based stop, or I could say, uh, this was an alert-based stop based on the underlying price.

And then I could track how those things play out over time.

And when I track them over time, I’ll be able to see what’s actually moving my needles, what alerts or what style of exit is actually beneficial for me, and what’s not.

And then I can make the adjustments to that, and then ultimately utilize that going forward and make iterations off of that.

That’s exactly what I do.

And I’m telling you guys, it has been the biggest game changer for me in terms of my trading when I’m tracking it.

So, if you want to use this, cool.

I’ve got a discount code below this story.

It’s also an affiliate link that supports the channel.

If you don’t, not a big deal.

Just make sure you’re tracking it.

You know, use Excel, take notes, just track it in some way so you actually have quantifiable data that you can, okay, great.

This is working, this is not working, and then make adjustments from there.

That’s all that really matters at the end of the day.

If you can make adjustments and then optimize it, great.

One last thing before we go. If your option is expiring today or whenever and the stop loss never hits, so you have the order, but the stop loss never hits, and it expires worthless, nothing, you don’t have to do anything.

If it expires with value, if you’re getting close to that expiration and you get to the end of the day and Robin Hood realizes your account that you can’t actually exercise this option, they’ll automatically liquidate you.

I prefer not to do that personally.

I don’t really, I’ve never actually had that happen to me cuz I just always will close out my order, but just be aware of that potential risk if you are in the money.

So, make sure you go out, close your orders up, close your position out if your option again is going to expire with value.

It’s more like a best practice in my opinion.