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Q: I want to set a stop-loss order on my option position. Should I use the stock price or the option price as the "trigger" to set the stop-loss order?
A: It is a matter of personal preference. Most exchanges allow stop-loss orders in options; however, most brokerage firms do not allow them for various reasons. Stop-loss orders are a way of attempting to limit your losses on an investment once that investment goes a certain amount in the "wrong" direction. Generally, most people who set stop-loss orders use the actual price of the investment (in this case the option price) for the "trigger" which decides when to liquidate a losing position. On the other hand, some people use options to execute a strategy based on technical analysis of the underlying stock. For example, an investor might feel that a certain chart pattern in a stock makes him believe that the stock is due for a rally. To "monetize" that opinion, the investor buys calls. He may then believe that if the stock instead drops to a certain price, that bullish opinion is no longer warranted, and he would not want to be "long" anymore. In this case, the investor might prefer to use the stock price as the trigger for the stop-loss order. As always, check with your broker to see if he accepts these types of orders. Once "triggered," the stop order can be of two different types: a market order or a limit order. This is another decision for you. Again, personal preferences would rule; there is no better or worse choice.
Q: Is it true that when executing buy-write order(s), there needs to be two orders and that both are executed at the ASK price?
A: The short answer is an unequivocal "maybe". It's possible that with a multi-part order (such as a buy-write) that the options part of the trade MIGHT occur at the ask price, but there is no guarantee. When traders enter buy-writes, they are usually entered on a single ticket, for a "Net Debit". In this case, the prices received for the call, and paid for the stock matter only in the sense that the net dollars spent should not exceed the (debit) limit.
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