price difference in Stop limit order for option trading

Question

I am new to the stop limit order. I want to set a stop limit order so that when my the premium of my long call option drops to a certain level, the system will automatically sell it.

For example, the premium for the AAPL option is 20 dollars right now. When it drops to 10 dollars, I want the sell order to be triggered. So, I set the stop price to 10 dollars.

However, how should I set the limit price? Like, how far away should the limit price be from the stop price? In my example, should I set the limit price to 9.5 or 9?

I tried in Interactive Broker, but the system told me the limit price cannot be too far from the stop price. I don't know how far is too far. That is why I am asking.

Answer 1

If you want out at $10, I'd suggest that you make your stop price a bit higher. Bear in mind that because this is a limit order, you need some room between your stop and limit prices because that's your window for execution. If it's too narrow, the order is less likely to fill.

I tried in Interactive Broker, but the system told me the limit price cannot be too far from the stop price. I don't know how far is too far. That is why I am asking.

Check your default settings. IBKR has some settings that help to reduce fat finger trades. For example, you might have a preset limit of say 500 shares per order or say 10 option contracts. I have reconfigured mine to my trading limits. Note that if an order exceeds such a limit, it adds another screen step where you can override and transmit or cancel. I use these.

Perhaps your inability to place your limit order is because of a changeable default setting such as the above or perhaps that's just the way it is (IBKR policy). If it's the former, go into Configure Settings. Or if you wish, call tech support.