MTM Stop-Loss & Auto Square-Off: Risk Rules That Save Accounts
An MTM stop-loss and an automatic square-off are the two risk rules that keep option sellers in business. Here's how they work and how to set them sensibly.
Short answer: An MTM stop-loss closes your position when mark-to-market loss hits a rupee or percentage limit you set in advance. An auto square-off closes positions at a fixed time so you never carry unintended risk. Used together, they convert "I'll watch it" into a guarantee — the difference between a bad day and a blown account.
What MTM actually is
Mark-to-market is your live, unrealised profit or loss — your open positions valued at the current market price, tick by tick. An MTM stop watches that number and acts the moment it crosses your line.
Why option sellers need it most
Short options earn a little, often, and lose a lot, rarely. That payoff shape means one unmanaged trade can erase weeks of gains. A pre-set MTM stop caps the rare disaster while leaving the steady income intact. It's the first rule every seller should automate — see the full list in 7 rule-based automations.
Types of stops worth setting
- Net MTM stop — total book loss limit (e.g. close everything at −₹5,000).
- Per-position / per-leg stop — protects against one leg running away.
- ATM-straddle stop — volatility-aware: exit when the ATM straddle expands by a set %, catching the move early.
- Trailing stop — locks in profit by following the position as it moves your way.
Setting sensible levels
| Setting | Too tight | Too loose | Sensible |
|---|---|---|---|
| MTM stop | Stops out on noise | Lets a disaster grow | A multiple of average daily swing |
| Profit target | Exits before edge plays out | Gives gains back | 50–70% of max premium |
| Square-off time | Cuts winners early | Risks late-day spikes | A few minutes before close |
The right numbers depend on your instrument and style — but having them is non-negotiable.
Auto square-off
Even with a stop, a position left open into the close carries gap and late-spike risk. An auto square-off at a fixed time (or auto-hedge) removes that. With SEBI's tighter intraday rules, timed exits also help you stay inside position limits.
FAQ
Will an MTM stop guarantee my loss is exactly the limit? No — fast markets can slip past the level. It bounds risk tightly but not perfectly; size accordingly.
Should the stop be on premium or P&L? Both have a place. A P&L (MTM) stop is intuitive; an ATM-straddle stop reacts to volatility. Many traders use both.
Gravity Algo runs MTM, ATM-straddle and position stops plus timed auto square-off, enforced across web, Windows and macOS. See risk controls → · Start free →. New to the concepts? Visit our learning hub.