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RISK MANAGEMENT
Professional option call
put traders use sophisticated methods because they take great care to minimize
risk. We, the individual investor, have it easier. We have simple tools
that allow us to measure the risk of investing with option call put. For
example, there is the risk of losing (or earning) money as the days pass. Or
the risk/reward possibilities that come when the underlying stock rallies (or
falls).
We’ll get into topics
related to risk in the days to come, but for today it is enough to
understand that option call put come with built-in
risk-measuring tools, collectively referred to as 'the
Greeks." No other investment vehicle makes it so easy to measure
and mange risk.
New option call put traders
often believe it is difficult to use these tools. The math may
be complicated, but using the numbers is a cinch. Brokers provide the
numbers and use the ones that interest us.
Individual investors
usually take a little extra risk, seeking larger
profits per trade. One of the topics that we'll talk about in detail is how to
measure and manage risk.
Don't get the wrong
idea. I mention risk management frequently because
all successful traders understand the importance of doing so. The sad truth is
that there are always inexperienced traders who don't believe that
understanding risk is important, and the vast majority of them wind up with
devastated accounts. I want you to succeed, so the warnings come first. You
want to begin trading with a winning, risk-conscious, mindset.
Option call put strategies are
not inherently risky -- unless you, the trader, decides to make a high-risk
play. Option call put strategies come with limited and defined risk, and that
is beneficial to each trader.
I’ll warn you about such
high-risk strategies and do my best to get you to avoid them.
However, we are each our own master and we trade as we see fit. Using
risk-management tools allows you to understand exactly what can
go wrong with each trade -- and that means no unpleasant surprises.
STOCK VS.
OPTION CALL PUT
People who invest in
stocks almost never go broke because stocks seldom lose 50 to
100% of their value in a single day.
