Upbeat music plays throughout.
Narrator: When you're trading options, do you ever feel like you're missing out on your exit signals because you're not sitting in front of your computer monitoring your trades?
On-screen text: Setting up an OCO order to exit options. 1. Identify underlying support and resistance. 2. Create target exit order. 3. Create stop order.
Narrator: Hey, traders, I'm David Bruner. I work on the Trade Desk care at Charles Schwab, and we're going to be taking a look at an advanced order type called first triggers OCO, or one cancels the other, and we're going to use that with a price condition based on the underlying stock price to determine our exit signal. Let's jump to thinkorswim.
On-screen text: 1. Identify underlying support and resistance. Consider indicators like Keltner Channels.
Narrator:
So let's get started by looking at our chart here. We're going to use Tesla (TSLA) as our example today.
On-screen text: Keltner Channels. Volatility-based lines placed above and below a moving average.
Narrator: And I put on the Keltner Channel as our indicator, which is going to represent a moving average here in the middle, as well as the average true range to determine our lower support line and our upper resistance line. The average true range is just going to determine, based on the period that we're using, how far the stock may move in that timeframe to determine these points. So for example, Tesla is currently trading at $282.16, and we can see here on our Keltner Channel, our upper band is at $291.33, our moving average here is at $256.58, and our lower band is down at $221.84. And so we're going to use these points to help us determine the range for our trade.
So let's switch over here to the Trade tab, and we're going to be looking at an option trade today. So first thing we need to do is choose our expiration. So let's give ourselves some time on this trade. We're going to go down to the June 20, 2025 expiration, giving us about 51 days for this trade. And to determine our strike price… let's switch back to our chart for a second. It seems like Tesla has been on a downturn here, and it's kind of made a run up based off of our support, and now we hit our upper band and we're retreating a little bit. So for this trade, we're going to look to revert back to that mean of $256.58.
Animation: The platform changes from the Charts tab to the Trade tab. The Ask price of the 250 put is selected bringing up the Order Entry Tools pane.
Narrator: And so that's going to be our goal with this put that we're going to do, because buying a put, going long a put, means we think it's going to be going down. So let's pick a strike price of $250.
And so the first thing we would do, this advanced order type, we're going to be using first triggers OCO. Our trigger is going to represent us purchasing this put, and now we need to put in our OCO, which again means one cancels the other. So I'm just going to come over here, and click on these lines. You could also right-click on your mouse to do this, and we're going to create an opposite order to create our first sale, and then we're going to do a duplicate order on our sale to create another sale.
So now we have the base of this trade, we have our trigger, which is the buy, and then we have our two sells.
Animation: The platform goes from the Trade tab to the Chart tab.
On-screen text: 2. Create target exit order. Consider using the price of the underlying as a trigger.
Narrator: So now we have to go in here and customize this. So first thing we want to do is determine what our price target is. And so like we said, looking at this chart, we're looking for the stock to get back down to about $256. And so we're going to click on this gear here, which it's not going to be showing it until you hover over.
Animation: A gear icon appears on the far right side of the first exit row in the Order Entry Tools pane.
Narrator: So we're going to click on the gear, and this is going to bring up our Order Rules section. If you look down on Conditions, you can see we'll do this based on a price condition.
Animation: The Submit at: line is highlighted, selected, and de-selected.
Narrator: So one thing to note, people kind of get confused because they see this box, and they think if they click on that, that's going to trigger this, but that's not the case. This is going to trigger a time condition order, which is not what we're going to be doing today. So leave that box unchecked.
Animation: The mouse moves lower to a matrix with four columns titled Symbol, Method, Trigger, and Threshold.
Narrator: We're going to go in here, and we're going to type in our symbol, which is Tesla, our method, which is just going to be the last traded price of Tesla, the mark price, and in this case, because we're looking for it to go to about $256.58, we're going to be saying if the trigger for the Tesla price is less than or equal to, our threshold is where we're going to enter that price, $256.58.
Animation: The Limit linked to: box is highlighted above the Conditions section.
Narrator:
And because we don't know what the option price is going to be when Tesla is at $256.58, what we're going to want to do next is go up to our Limit Link To section, and instead of MAN, which stands for manual, we're going to switch that to TRG, which stands for trigger. And we can see that this created a limit offset section. So what this means, when Tesla hits our threshold price, it's going to send out a limit order at the current price of the option. But because we don't know what that price is going to be, and we want to give ourselves a little bit of wiggle room to get filled, we can use an offset. You can experiment with this, and it does matter what stock you're trading, and how valued those options are because options are going to move in different ways based on those premiums.
On-screen text: The price is $20. Limit offset is $0.15. The limit order price is $19.85.
Narrator:
So we just switched our limit offset to $0.15. Just as an example, let's say the option price at that time that it gets triggered at $256.58 is $20. This limit offset means that it's going to send out a limit order for the option at that time at $0.15 below. So it's going to go out at $19.85, giving us a $0.15 buffer so that we can get filled if the price is still moving.
I definitely recommend once we set this up to go down to the description, and read out what you just set up, because this is going to explain to you what your order is, so you just want to make sure you set this up correctly. So now we're going to save that.
On-screen text: 3. Create stop order. Consider using the price of the underlying as a trigger.
Narrator:
And now we have our profit target enabled in here, and now we're going to want to work on our protection, which is going to be our stop order. So we're going to click on Limit to change our order type, change it to a stop.
Animation: The mouse selects the gear icon on the far right side of the second exit row in the Order Entry Tools pane. This opens the Conditions screen.
Narrator:
And similar, we want to use our price condition so we can determine where Tesla is at the time, send off an order to close our option if it's going against us.
Animation: The platform goes back to the Charts tab and the upper band of the Keltner channel is highlighted.
Narrator: So looking at this upper band here, going to be our stop in this case. If Tesla keeps going up, that means we were wrong buying our put, and we want to mitigate our risk. So Tesla, upper band for the Keltner Channel is $291.33. So that's what we're going to use for our price condition for our stop.
Animation: The platform goes back to the Conditions screen for the order. The matrix if filled in with TSLA as the Symbol, Mark as the Method, greater than or equal to is the Trigger, and $291.33 is the Threshold.
Narrator: Same thing, we're going to go into our symbol, Tesla. So this time, though, because we're looking at a price that's above the current price, we want to change that to greater than or equal to. And we'll put in our threshold here, $291.33.
Narrator:
So now we're setting up our stop. We're going to use that same $0.15 as our stop offset, and that's going to trigger when Tesla is greater than or equal to our upper target, which is $291.33. And again, we're just going to go down, read through our description here, and make sure it is what we want it to do, and click Save.
Animation: The time in force or TIF for each of the exits is changed to good til cancelled or GTC.
Narrator:
And so we're going to go in at the current price of $12.70, and with these orders that we just set up for our limit and for our stop, likely not going to hit today. And so I just changed these order time and forces from day to good till canceled. That way when the day is over, if these orders weren't to fill, I don't have to come in every day and reset these up. They're going to stay open and working. So we look good to go now.
Animation: After clicking Confirm and Send, the Order Confirmation Dialog window appears with a summary of the orders.
Narrator: We're going to click on Confirm and Send. Again, always good to double check this is exactly what we're looking for. So we're buying the option at the current price for our first order. We're selling it. If Tesla's mark is at or below $256.58, which is our profit target looking at the moving average line, or if Tesla… if the trade goes against us, and Tesla is at or above $291.33, then we're getting out there as well. So we're good to go. We're going to send that order through.
So the price you're filled at may be higher or lower than what you expect. For our profit target order, we did use a limit, and so we are going to get filled at least that limit price, but we're not guaranteed execution on that fill if we can't at least get that price.
So today, we showed you another tool to help you out with your option trading with that first triggers OCO order. That way you don't need to sit in front of your computer and monitor these trades at all times.
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