Bracketed Orders in Stock Trading

If you are planning to buy stocks as a long term investment you might want to consider placing a bracketed order on it.

A bracketed order goes one step further than a trailing stop order.

Remembering that a trailing stop order, you are in control of your investments because you are able to limit the amount of your losses by setting stop price.

With a bracketed order, you are able to not only set a limit on your losses, but you are able to set a limit on your profit, that when reached, your stock will be sold.

This type of order is best illustrated with an example.

Your broker places a bracketed order for 100 shares from Linens-n-Things, a department store, priced at $50 per stock, placing a sell limit order at $100 and a sell stop order at $45.

If the price per stock moves down to $45 or up to $100, the stock will be sold.

Therefore, the investor will either earn a $5,000 dollar profit, or take a $500 loss in profits.

Options Trading Mastery: Time Decay and Volatility Trading Opportunities (5)

Either way, the spread will have to be constructed with the at-the-money option being long if you feel volatility will increase or short if you feel volatility will decrease.


If you feel the stock would most likely fall, you will have to decide between buying a vertical put spread and selling a vertical call spread.


Again, either way, the spread will have to be constructed with the short option being the at-the-money.


As you can see, the vertical spread does not have to be used only in directional scenarios.


It is very versatile allowing the investor several choices among a diverse group of potential uses.


It also affords limited risk, albeit limited profit potential, to both the buyer and the seller.

Options Trading Mastery: Time Decay and Volatility Trading Opportunities (4)

So, if you think that implied volatility is likely to increase, you can set up a vertical spread by buying an at-the-money option and selling either the in-the-money or out-of-the-money option against it.


Conversely, if you feel implied volatility will decrease; you can set up a vertical spread by selling an at-the-money option and buy either an out-of-the-money or an in-the-money option against it.


As to how to set it up, you would follow the same guidelines as you would for setting up a vertical spread to take advantage of time decay.


Decide which direction you feel the stock would most likely move.


If you feel the stock would most likely rise, you will have to decide between buying a vertical call spread and selling a vertical put spread.