Definition of stop out

The term "stop out" is commonly used in the financial industry, particularly in the context of futures and options contracts. Stop out, in this context, refers to a mechanism that is put in place to mitigate the risk associated with holding multiple trades simultaneously. When an investor enters into multiple contracts, each with margin requirements, there is a potential risk that the aggregate loss on all the positions may exceed the available margin. In this case, the brokerage firm may require the investor to add additional margin or liquidate some positions to free up margin for the remaining contracts. This process can be time-consuming and may impact the profitability of the remaining positions. To avoid these issues, brokers provide the option to implement a stop-out mechanism. Under this mechanism, if the total value of an investor's entire position becomes less than the initial margin, the broker will automatically liquidate all positions, starting with the least profitable, until the account has sufficient margin to cover the remaining positions. This helps to stop losses and minimize the impact of large drawdowns on the remaining positions. Stop out thus provides an essential risk management tool for investors and helps to protect them from the potential consequences of high exposure to the market.