It is one thing to identify a stop-loss level for a position. It is quite another to take those stop-losses. Identifying an appropriate stop-loss requires accurate reading of price charts. Taking the stop-loss requires a disciplined approach to trading. This week, we discuss why stop-loss on options is best applied on an underlying price chart.
Continuous price data
A stop-loss is the level at which you decide that carrying the position is no longer optimal. In the case of a long (short) position, this is the level identified from the chart which could indicate that the bulls (bears) are no longer in control. You can determine the stop-loss for a futures position looking at the one-month continuous futures price. This is the chart that shows one-month futures price stitched together over a chosen period.
You cannot have continuous one-month equity option price chart or continuous one-week Nifty option price chart for a particular strike. Why? For one, option loses time value with each passing day, and the time value of all options becomes zero at expiry. So, stitching together the same strike option, say 25200, across time may not be meaningful; the option would have lower value as it approaches near week expiry and higher value immediately thereafter as the next expiry will be days away. And two, the price of the option is determined by the location of its strike in relation to its underlying price. So, 25200 strike today may be trading higher because it is in-the-money (ITM) whereas it would have been trading lower a month ago because it was out-of-the-money (OTM).
Now, if we cannot have continuous prices on an option strike, data is not enough to graph its price. So, how will you fix the stop-loss using the option chart? That is why it is important to determine the stop-loss for your option position based on the underlying price chart. Note that stop-loss on the options are best applied on an intraday basis, not on a closing basis as in the case of futures contract. That is, if your stop-loss is, say, 750 based on the underlying price, it is best you close your long call position if the underlying trades intraday below 750 in the spot market. The reason for using intraday prices is because of the time decay that options suffer from.
Optional reading
Stop-loss for equity options must be based on the underlying price and for index options preferably on their index futures, as spot indices are not tradable contracts. The loss from stopping your option position based on the underlying or its future price need not be equal to the loss if you were to trade the underlying or its futures contract with the same stop-loss. This is because a long option position loses value because of its delta and theta when the underlying price declines.
(The author offers training programmes for individuals to manage their personal investments)
Published on December 6, 2025
