Definition
A stop-loss is a predefined price or loss level at which a trader exits a losing position to prevent the loss from growing. It is the downside discipline that pairs with a profit target.
A stop-loss can be a mental rule the trader commits to, or a standing stop order that the brokerage executes automatically when the price is reached. Either way, the decision to exit is made calmly in advance, not in the panic of a falling market.
Why it matters
How it works
Before entering, the trader picks a stop level — a price, a percentage, or a dollar amount of loss they will accept. When the position reaches that level, it is closed without hesitation. With long options, premium can move fast, so some traders use a percentage of the premium paid as the stop. Stops have trade-offs: a stop set too tight is triggered by ordinary noise and shakes the trader out of good positions, while a stop set too loose defeats its purpose. The skill is placing the stop where it allows normal fluctuation but still caps real damage — and then actually obeying it.