What is a Stop Order for Option?

A stop order is an order to submit a buy or sell market order if and when the client-specified stop price hits. A stop order does not guarantee a specific execution price and may execute significantly away from its stop price.

Assume that the current market price of the option is USD10:

BUY: A buy stop order is entered at a stop price above the current market price to limit the loss on a short position or protect its profit.

If you place a buy stop order of Company X, call options with a stop price of USD11. Once the market price hits the stop price, a market order to buy the call options is placed.

SELL: A sell stop order is entered at a stop price below the current market price to limit the loss on a long position or protect its profit.

If you place a sell stop order of Company X, call options with a stop price of USD9. Once the market price hits the stop price, a market order to sell the call options is placed.