Trailing Stop
Stop order that follows favorable price moves
What is Trailing Stop?
Trailing Stop A trailing stop is a dynamic stop order that automatically adjusts its trigger price as the market moves favorably, maintaining a fixed distance in dollars or percentage from the highest (for long positions) or lowest (for short positions) price reached. Unlike a static stop-loss, a trailing stop locks in profits as the position gains value while still providing downside protection. How it works: When you set a trailing stop on a long option position, you specify either a dollar amount or a percentage as the trail distance. As the option price rises, the stop price rises with it, always staying the set distance below the peak. If the option price reverses and falls to the trailing stop level, a market order is triggered to sell the position. Crucially, the stop only moves in the favorable direction and never moves down. For example, you buy an NVDA $900 call at $15.00 and set a $3.00 trailing stop. Your initial stop is at $12.00. As NVDA rallies and the call rises to $25.00, your trailing stop moves up to $22.00. If the call then drops to $22.00, you are stopped out with a $7.00 profit ($22.00 - $15.00) per contract, or $700 per contract. Without the trailing stop, you might have held through a full reversal back to $15.00 or lower. Traders use trailing stops to ride momentum while protecting gains. They are particularly useful for directional options plays where you have a strong move but are uncertain about the exit timing. Be aware that in fast-moving or illiquid options markets, the fill price on a trailing stop can slip significantly from the trigger price, especially during after-hours gaps or around earnings announcements.
Complete Definition
A trailing stop is a dynamic stop order that automatically adjusts its trigger price as the market moves favorably, maintaining a fixed distance in dollars or percentage from the highest (for long positions) or lowest (for short positions) price reached. Unlike a static stop-loss, a trailing stop locks in profits as the position gains value while still providing downside protection. How it works: When you set a trailing stop on a long option position, you specify either a dollar amount or a percentage as the trail distance. As the option price rises, the stop price rises with it, always staying the set distance below the peak. If the option price reverses and falls to the trailing stop level, a market order is triggered to sell the position. Crucially, the stop only moves in the favorable direction and never moves down. For example, you buy an NVDA $900 call at $15.00 and set a $3.00 trailing stop. Your initial stop is at $12.00. As NVDA rallies and the call rises to $25.00, your trailing stop moves up to $22.00. If the call then drops to $22.00, you are stopped out with a $7.00 profit ($22.00 - $15.00) per contract, or $700 per contract. Without the trailing stop, you might have held through a full reversal back to $15.00 or lower. Traders use trailing stops to ride momentum while protecting gains. They are particularly useful for directional options plays where you have a strong move but are uncertain about the exit timing. Be aware that in fast-moving or illiquid options markets, the fill price on a trailing stop can slip significantly from the trigger price, especially during after-hours gaps or around earnings announcements.
Example
You buy a call at $3.00 and set a $1.00 trailing stop. As the call rises to $6.00, your stop moves to $5.00, locking in $2.00 of profit.
Related Terms
Frequently Asked Questions
How does a trailing stop work on options?
A trailing stop on an option automatically adjusts the stop price as the option rises in value, maintaining a set dollar or percentage distance from the peak price. If the option reverses and hits the trailing stop level, a sell order is triggered to close the position and lock in profits.
Should I use a dollar or percentage trailing stop for options?
Percentage-based trailing stops work better for higher-priced options where dollar moves are larger. Dollar-based stops are simpler and work well for lower-priced options. For a $5.00 option, a $1.00 (20%) trail is common. For a $20.00 option, a 15-20% percentage trail provides proportional protection.
What are the risks of trailing stops on options?
The main risks are slippage in illiquid markets, getting stopped out by normal volatility before a bigger move, and gap risk where the option opens below your stop level. Trailing stops trigger market orders, so the fill price may be worse than the stop price during fast moves.
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