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These neutral trades can move too far in either direction and begin to encroach one of the short option strike prices. To minimize losses we should consider covering(buying back) the short option when it is at risk for becoming "in-the-money".

Since these trades are by nature a neutral strategy, we don't want the underlying stock or index price to close, at expiration, above or below the short option positions. To avoid this, we provide upper stop loss and lower stop loss numbers. These numbers tell you when to consider exiting the short option that is being threatened by the underlying price.

If the stock/index crosses the upper stop loss, you should exit the short call option with a buy-to-close order.

If the stock/index crosses the lower stop loss, you should exit the short put option with a buy-to-close order.

When you first enter the trade, you may want to consider entering a contingent order to close either of these options based on the underlying stop loss prices. This will be 2 separate contingent orders for 2 separate option trades.

We illustrate the order entry for each of our trades using optionsXpress.com as your broker. Click here for more information.


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