Trailing Stop

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.