For Stop Purposes Use The Spread Price or Underlying Price?

#1

Hello Darrell. This morning I was looking at trading a box spread on the TF. Following were the prices of the spread and underlying on the close of the 5 minute bar at the time I was looking to buy.

Underlying chart had a close of 1032.7 and most recent PL support at 1031.6 (difference of 11 ticks) Spread chart had a close of 1034.0 and and most recent PL support at 1033.4 (difference of 6 ticks)

My plan calls for exiting a buy position if it goes 5 ticks below the most recent PL. I guess my question is whether or not it’s feasible to use the spread chart for the purposes of determining stops as the spread chart would obviously give a better reward to risk scenario and allow me to trade more contracts.

Thanks Darrell

#2

I do not trade based on a derivatives chart -

ie you don’t trade calls on aapl based on a call chart you trade them based on an aapl chart and then look at the price ladder to find the best call - then go back to the chart to make your decisions

Note depending on how much premium is taken out of the trade this may not affect your risk/reward as that distance will stay pretty similar - so a exit say 10 ticks down on TF will often also be about 10 ticks down on Small Cap 2000

Also choosing bid/ask/mark/last etc… all affect the charts quoted price

Due to changes in IV, demand, bid/ask, premium over time etc… i would not recommend that you trade based on the spread chart at all. Its good for letting you see the difference thats about it.

Also i don’t trade based on time based (ie 5 min) charts as i don’t want another bar on my chart just because time passed i want it because price moved.