Just like in trading stocks, the Take-Profit/Stop-Loss (TPSL) order is a powerful tool for investors to protect their options positions, especially in a volatile market.

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What is a TPSL Order?

TPSL is an order type used to exit an existing position.

• A take-profit order will automatically close your positions once the target price is reached to lock in profits.
• Similarly, a stop-loss order will be triggered when the target price is reached to stop losses.

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How to Set a TPSL Order

Let’s suppose you bought one call option contract of AAPL at $110, with a premium of $9.70. The contract is currently trading at $10.

Unfortunately, the price of AAPL has been falling recently, causing your position to lose value. In this case, you may decide to place an order to lock in possible profit and stop possible losses.

The first step is to set the take-profit limit price where you would like to sell. Since the market may potentially reverse higher, let’s set it to $10.50. The second step is to decide on a stop price that you can accept. For example, let’s set the stop price at $9.50

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There are three possible scenarios:

a) The price of AAPL has small fluctuations, so the contract price does not change much. Neither the take-profit nor the stop-loss order is triggered.

b) The price of AAPL surges for a while and falls back. The take-profit order is triggered and filled at $10.50. The stop-loss order is automatically cancelled. You've locked in a profit of $80.

c) The price of AAPL falls all the way down. The stop-loss order is triggered at $9.5 and filled at that price. The take-profit order is automatically cancelled. You’ve limited your loss to $20.

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From the example we can see that TPSL order helps us when the market is volatile by placing orders to either lock in profits or stop losses.

Disclaimer Regarding Buy/Sell Limit, Stop Loss, Sell Stop, and Stop Limit Orders:

Due to fast-moving markets, market volatility, and illiquid markets, take profit and stop loss orders may not execute in it's entirety or at all. In these instances, the stock price may skip over the set price and leave the order unexecuted or may execute at prices which are substantially different than expected.