That isn't how a stop-loss actually works. You aren't guaranteed execution above a particular price.

You could lock in gains using puts, but when you go and price out doing so you'll see exactly how much the market values the risk in the position.

So, I was on the wrong direction of this trade, having bought puts on Monday and Tuesday.

The stock rocketed up today and the puts rose about 20% as well (which is crazy and counter-intuitive). So, I was entirely wrong and made money anyway. Once I realized I couldn't account for what was happening, was totally wrong on the direction, and being offered a token gain to get out, I got out.

Someone was bidding up $50 puts expiring in 3.5 weeks and buying contracts today, while the shares were in the mid-300s. That's insane implied volatility.

> Someone was bidding up $50 puts expiring in 3.5 weeks and buying contracts today, while the shares were in the mid-300s. That's insane implied volatility.

Because the higher you are, the closer you are to a crash. Peaks take time to build, but crashes can happen overnight (or premarket).

The put is just another instrument that trades. What will under normal circumstances keep a put close to the "correct" price? Well, if the price goes too high, people will start writing puts, driving the price down.

If you write a put, you're long the stock. To hedge yourself, you'll need to short it. To the extent that that is difficult right now, nobody will be willing to write puts. (Strictly speaking, the put is so out of the money right now, that one would not have to short much today. But as soon as the stock price falls and approaches the strike, the writer of the put would need to start shorting. "Hey, anyone got some shares I could borrow?")

On the other hand, if you want to take a negative view on the company, buying a put is sensible thing to do. That'll drive the price of the puts up.

That's just a cheap way to bet on the trade being played out by then: buy some deeply out of the money puts with a relatively low premium today (the further out of the money, the lower the premium... so you can afford to buy more) with the expectation that they'll be deeply in the money in a few weeks. Works a treat... as long as you're not wrong on direction, magnitude or timing.

> The stock rocketed up today and the puts rose about 20% as well

This is called IV expansion.

The implied volatility isn't insane if the underlying is, you know, insanely volatile.

If it gaps down stop loss orders won't execute at the stop loss order price (because there is no buyer at that price). Therefore previous paper profits are not locked in with certainty with stop loss orders. You need prices to swoop down in an orderly way with sufficient liquidity for stop losses to work in the way I think many imagine they do.

It would execute at the gap right?

It would go to the first buyer under the limit. So for example if you had a stop loss at $200 and the stock went from $201 to $2, it would sell for $2.

tldr; When your stop-loss is hit, it executes at the best price available at the time, which (as far as I know) has no guarantees.

I think a good example of this is the Ethereum flash-crash on Coinbase in.... 2017? Something happened (IIRC someone submitted a very large market-sell, maybe by accident), but it completely wiped out half of the order book.

This triggered all of the stop-losses that people had submitted. But... almost the entire order book was gone. So they sold very low. Which triggered more stop-losses. Which sold lower, and so on.

In the end stop-losses ended up largely selling to one super-lucky-account-that-I'm-sure-set-this-up-as-a-joke-and-forgot-about-it who had a limit buy in for 10c/ETH.

IIRC the price was ~350 when this started. When people were able to start buying again, the price jumped up again (obviously).

But this lucky person was able to buy ~5k ETH at 10c, because all the stop-losses triggered.

¯\_(ツ)_/¯

Stop loss is really the wrong term mathematically. In truth, a "stop loss" is really better thought of as a "max price". If you set it up to sell when the prices drops to $320, you are guaranteed that it will sell at a price below $320, not that it will sell at $320.

In truth, you are not even guaranteed to be able to find a buyer.

> If you set it up to sell when the prices drops to $320, you are guaranteed that it will sell at a price below $320, not that it will sell at $320.

IIRC, that’s closer than the naive interpretation (“you will sell at exactly $320 if the price drops to or below that level”), but it's still not quite right. Unless I'm mistaken, a stop-loss @ $320 is actually “if the price is at or below $320, submit a market sell order”. In theory, it could execute above $320, though at or below is vastly more likely. And, as you note, you aren't guaranteed it will execute at all.

To be precise: As soon as a trade <= 320 is printed, the stop loss turns into a market sell order. It could sell over 320, it could sell under 320 (though much more likely the latter).

There are also stop limits, vs stops which just sell at market. there’s also OCOs and OSOs that can make things interesting.

with a stop limit, you'll simply be left holding the stock if it drops below your limit. depending on what you expect the market to do, this could actually leave you in a worse position (ex, if the value keeps dropping). I'm sure you know this, but, understanding your exit from a speculative position is just as important as your entry.

Someone has to be around to buy the stock. Stop-loss or not. Once all this implodes, there will be a ton of retail investors left holding the bag.

not really. you're going to get killed because shorters have been hunting for stop losses all day for the past week.