DOES THE REWARD JUSTIFY THE RISK?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RISK MANAGEMENT FOR THE NEWER TRADER

BUYING OPTIONS AND PREDICTING MARKET DIRECTION
Newer option traders tend to adopt the strategy of buying calls when they are bullish and puts when they are bearish.
It is very easy to buy some options based on your market savvy. In other words, you -- like the majority of new investors -- probably believe that the trade will be profitable because you believe that the stock price will behave as you predict.
That is based on the belief that you have a talent for stock picking and timing the market.
Despite a ton of data to the contrary (Numerous available data sources illustrate that individual investors perform far worse than the market averages when making buy/sell decisions) most still believe that they are not average investors and have the ability to beat the market.
RISK VS. REWARD
Those beliefs often lead to unwise investment decisions. That brings up the topic: How much money can you afford to risk when making investment decisions based on your ability to know what the future holds?
The more difficult questions are:
·         Can you estimate the probability of earning a profit from a given trade?
·         How does the potential profit compare with the money at risk?
EXAMPLE
The inexperienced option trader may look at a RS 40 stock, decide that the price is heading higher and seeing that the two-month option with a RS45 strike price costs 'only' RS0.15 (that's RS15 per contract), decides to invest RS75 by buying 5 contracts.
ANALYSIS OF THE TRADE
The risk is only RS75, so at first glance this seems to be an acceptable trade. After all, the potential gain is theoretically unlimited and the maximum loss is just RS75.
However, that is not the whole story. This is a stock whose price fluctuations are tiny. Translation: this is a non-volatile stock. In fact, over the past couple of years, the average daily price change is only 5-cents per share. The probability that the price can rally far enough in 45 trading days to turn this investment profitable is less than 1%. In other words, the likelihood of earning any profit from this trade is dismal and the most likely outcome is a 100% loss.

YOUR FIRST OPTION STRATEGY. SHOULD IT BE BUYING OPTIONS?

CATEGORY: FOR THE OPTION NEWBIE

It seems natural to buy options. After all, isn't that why they exist? The answer is no. Options were created to shift risk from the risk avoider to the risk taker. They were not created as a tool for speculators, although speculators play an important role in the options world.
It is important to understand that all investing has a certain resemblance to gambling. However, investors gamble only when they make trades based on too little information or when the trades are based on ‘hoping’ that something specific will come to pass.
I discourage gambling with options and I hope to encourage you to adopt a similar attitude. Nevertheless, it is convenient to use gambling vernacular when discussing certain aspects of trading.
TRADING OPTIONS IS QUITE DIFFERENT than trading stocks. When buying a call option, the investor (or trader) Is making a bet that the underlying asset (usually a stock, but it may also be an ETF (exchange-traded fund), index, currency, commodity etc.
Will move higher or lower before the option expires. Under most circumstances, it is a bad bet.
These are the primary reasons:
DIRECTION. Although most investors/traders believe they have the skill to know when the market will move higher or lower in the future, there is a ton of evidence that says just the opposite. For example, studies show that most individual investors under-perform the market averages, year after year. This is more a result of buying and selling at the wrong time, rather than of owning the wrong stocks. No matter the reason, the average active investor does worse, on average, than those who tend to buy and hold. Much of the poor results can be blamed on buying when everyone’ is bullish (near the market top) and selling when traders dump stocks in a panic (near the bottom).
Another study shows that most investors perform far worse than they believe they do. This seems strange, but perhaps this finding can be blamed on a poor memory. More than likely it is a result of traders remembering good results while tending to forget their worst trades.
If you believe you are a good stock picker and will get the direction right significantly more than half the time, then perhaps you can make money buying options.
However, there is much more to consider. See below.
Keep a written record of every buy/sell decision. This is part of your trade plan. Do not fudge the results because you would only be hurting yourself. If you have a proven (in writing) track record of being able to earn far more than your trading expenses, then buying options may work for you.

OPTIONS FOR BUSY INVESTORS

Both investors and traders can use options.
The generally accepted difference between investors and traders is that investors make portfolio changes far less often and that they have the time and patience to allow their investments to grow. In other words, investors are not interested in instant gratification whereas traders prefer to make a trade, collect a quick (a few minutes to perhaps a couple of weeks) profit and exit the position.
Traders seek stock-market profits by selling as soon as a profit target is met. They never get married to a position. Nor do they have loyalty to the company whose stock they own. They often ignore the nature of the company itself, relying on charts to make buy/sell decisions. Some traders own positions for as little as a few seconds, while others may wait as long as two months for a position to work.
There is also another major difference. Trading is a full-time job because there is a continuous need to monitor positions and to make important decisions. Investing is something that anyone can undertake. Don't misunderstand. It is not a simple process. Instead it requires that an investor finds the time to do the necessary work for making important decisions. Unless you want to pay someone to manage your portfolio by buying mutual funds (a poor choice), ETFs (a good choice) or hiring a financial advisor, the successful individual investor does his/her homework. 
Investors tend to hold positions for years, decades, or even an entire lifetime. As a consequence, they make few investment decisions.
Investor portfolios should be examined on a regular basis (at least yearly) with the goal of unloading stocks that no longer deserve a spot in the portfolio. Alas, that seldom happens and many buy and hold investors believe in holding forever.
Timing is not a big issue because paying a few cents more per share, has little effect on the long-term results.

PHILOSOPHY BEHIND WRITING COVERED CALLS

COVERED CALL WRITING is a popular strategy among individual investors. It has also attracted the attention of mutual fund and ETF managers and there are a number of funds that use covered call writing as part of their investment strategy. I would offer a short list, but I do not want to recommend that anyone use such funds. 
If you have the time and willingness to trade your own money (as millions of stock investors do), then writing covered calls is something to consider.
It is not a good investment choice for everyone. 
When writing covered calls, stock selection is the single most important factor in determining your success or failure. Yes, selecting which option to write plays a big role in your performance, but if you own stocks that under-perform the markets on a regular basis, then you cannot expect to earn much (if any) money.
WHO WOULD WRITE COVERED CALLS?
Covered all writing begins with stock ownership and this article is written for such stockholders. It presents the pros and cons of adopting covered call writing (CCW) as a small or substantial portion of your investment portfolio.
CCW is also used by investors who have no current position in the individual stock, but who would buy shares with the intention of writing options and collecting the premium.
WHY WOULD ANYONE WRITE COVERED CALLS?
As with any other trading decision you must compare the advantages and disadvantages of the strategy and then decide whether the risk vs. reward profile suits your investment goals.
WHAT DO YOU HAVE TO GAIN?
·         INCOME. By selling one call option for each 100 shares of stock that you own, you collect the option premium. That cash is yours to keep, no matter what happens in the future.

NEUTRAL STRATEGIES FOR THE NOVICE

Options are versatile investment tools. They can be used for both bullish and bearish strategies. But what separates options from all other investment tools is that they can also be used for neutral strategies. Those are appropriate when:
·         You do not have an opinion on market direction.
·         You believe that the markets will be relatively unchanged over the near term.
Let's discuss some of those strategies.
Note: This article is intended for the novice options trader. More experienced traders can find additional information by clicking the links below.
Market-Neutral Option Strategies
Important note: Unless you are a very experienced trader, always enter these orders as "spreads." A spread order tells your broker that
·         The order contains two or more different options (each option is a "leg")
·         The order requires that the broker fill each leg, and not just one. By  entering a spread order with two legs, you will never find that you bought or sold one of the legs.
If you don't know how to enter such orders, ask your broker's customer service department  how to enter an option spread order. 
Calendar Spread. The trader buys one option (call or put) and sells another option of the same type (i.e., call or put) with these restrictions:
·         The option bought expires after the option sold (i.e., it is "longer-dated")
·         The underlying asset is the same for both options.
·         The strike price is the same for each option.
The longer-dated option always costs more than the near-term option.
Thus, the calendar is a debit spread.
Fact: Shorter-term options decay (i.e., lose value) more quickly than longer term options. (See Theta)
Rationale for buying a calendar spread: When time passes and the stock price remains essentially unchanged, the spread gains value because the option that you bought loses (or gains) value more slowly than the option that was sold.
Therefore, the price of the spread (the difference between the price of the two individual options) increases. This spread is appropriate when you believe that the stock price will remain near its current level.
Risk:
·         If the stock price moves far away from the strike price, then the spread loses money because calendar spreads are worth more when the options are at the money.
·         When the stock price runs higher, the nearer-term option gains value more rapidly than the option that you own (this is due to gamma).

NAKED PUTS; CASH-SECURED PUTS

8 FEBRUARY DLF 85 PUT ROCKSSS..!!! ACHIEVED FINAL TGT MADE A HIGH OF 2.85
FOR MORE ROCKING CALLS FILL UP THE FORM GIVEN HERE>>>
Selling puts option for income and for buying stock below market price.
Put writing (put selling) is a conservative option strategy and is ideal when you want to buy stock below current market prices. Cash-secured means that there is enough cash in the account to buy stock if assigned an exercise notice.
SELLING NAKED PUTS; CASH-SECURED PUT OPTIONS
Selling puts is not a high-risk strategy. It is no more risky than buying stock.
Despite everything you may have heard to the contrary, put selling is a strategy worthy of consideration by almost every investor who buys stock. The very bullish trader who expects to see a large upward change in the stock price represents the single class of investor who should not sell puts.
PRUDENCE
The so-called "prudent investor" is told that buying stocks is a good and conservative investment idea.
That investor is also told that selling put options is far too risky. Let's compare two investors who make a trade today:
·         The stock buyer pays for the investment in three days, when the trade "settles." If the stock price moves higher, the trader earns a profit. If the stock price declines, the stockholder incurs a loss. Very straightforward and easy to understand.
·         The put seller collects cash upfront when making the sale. He/she puts up collateral (to meet the margin requirement) to guarantee his/her ability to pay for the stock -- if and when it becomes necessary. If the option expires worthless, the collateral is released and the trader keeps the cash premium as the profit.
In other words, the stock buyer pays for shares at the time of the trade and the put seller promises to pay for stock at a later date. They each have the same risk: If the stock price undergoes a steep decline, each loses money.  This is not a risky proposition for the put seller who understands that he must not sell more than one put for each 100 shares he is willing to own.
Selling too many puts is a risky proposition, but selling too many represents poor risk management skills by the trader. it is not a reflection on the prudence of the strategy.
The put seller agrees (a binding contract) to pay $30 (the strike price) for shares at a later date, but only if he is required to do so. He collects $100 (premium, or option price) for accepting this obligation.  If the stock rallies, both earn a profit. However, the stock holder's potential gain is unlimited while the put seller cannot earn more than the $100 premium that he collected.
If the stock price falls, the stockholder always loses money.
For the put seller to have any loss (assuming that the position is held until the options expire):
·         The stock price must be below the strike price ($30 in this example) by more than the premium.
          EXAMPLE: If the stock is $28, the put seller must pay $30 for the shares. Because they are trading at $28, that is a $200 loss. However, the $100 collected earlier offsets a portion of that loss.
          EXAMPLE: If the stock is $29.40, the put seller earns a $40 profit ($100 premium minus $60 loss on stock price).
·         The put seller often earns a profit when the stockholder loses money. This is the part of the strategy that makes it so appealing. You sell a put option (taking a bullish stance), the stock price declines, and you still earn a profit! 
          EXAMPLE: The stock price moves from $34 to $32 and the stockholder loses $200 for every 100  shares owned. The put seller makes money because the option expires worthless and the profit is $100 (premium collected). 
 Some terminology useful for traders who sell put options
·         ASSIGNED AN EXERCISE NOTICE. When the owner of any option elects to exercise her rights, then the account of a trader who has a short position in that specific option (i.e., XYZ Jun 20 '14 30 puts) is chosen at random and notified.  The notice informs the trader that the option owner exercised an option and that he has been assigned (via a random process) as the person who must honor the terms of the option contract.  
In simple terms: When your account is randomly chosen you must buy 100 shares at the strike price for each option assigned to your account. There is no way out of this. By the time you see your account in the morning, the shares have already been purchased.
·         NAKED PUT OPTION.  A put that is sold unhedged (no offsetting, risk-reducing positions) and the trader does not have enough cash in the account to pay for stock, if it becomes necessary. The trader must borrow that cash from his  broker (using margin).
·         CASH-SECURED PUT. An unhedged put sale, but the trader does have enough cash in the account to but stock, if it becomes necessary. 

SELLING PUTS VS. BUYING CALLS

The bullish trader has a variety of strategies that can be adopted. Buying calls or selling put spreads are two of the most popular choices.
Let's look at the choices for the typical bullish option trader. The market is rising and he wants to makes some money from that rally. Not having a specific stock in mind, he decides to trade index options and chooses SPY, an ETF (exchange traded fund) that mimics the performance of the S&P 500 Index.
Using live data, it is Jun 12, 2014, 9:15 am CT. 
SPX is priced at 194.62.
Let's assume that we prefer options for which expiration Friday is Jul 18, 2014.
Our trader has a few possible choices. Keep in mind that most newer option traders prefer to buy out-of-the-money (OTM) options because they cost less than in-the-money options. More experienced traders understand that buying OTM options is a losing strategy over the longer term, but rookie traders have not yet reached that level of sophistication.
An at-the-money call option, the SPY Jul 18 ‘14 195 calls option costs $1.82, or $182 per contract.
Partial list of OTM options, and their premium (cost to buy):

·         SPY Jul 18 '14 196 call; $1.32

·         SPY Jul 18 '14 197 call; $0.98 

·         SPY Jul 18 '14 198 call; $0.68

Partial list of OTM put spreads and the premium available from selling them:

·         SPY Jul 18 '14 193/194 put spread; $0.39

·         SPY Jul 18 '14 192/193; put spread  $0.33

·         SPY Jul 18 '14 189/190 put spread; $0.20

Although there are other choices, let's assume that your choice is limited to these.
Call buyers, especially buyers of out-of-the-money calls must see the index price increase before they have any chance to earn a profit. That increase must come before the options expire, and the sooner the better.

THOUGHTS ON TRADING IRON CONDORS

"BUY DLF 85 PUT @ .90 TGT 1.65/2.2"
The iron condor is an option strategy usually adopted by traders with some option trading experience. That is as it should be because managing these positions requires an understanding of how money is made and lost -- something that most novice traders are unaware that they have not yet learned.

Below are some of my thoughts about trading iron condors.

Is trading iron condors the same as gambling in the stock market?

·         If you open a randomly chosen iron condor, you are gambling. When choosing a specific iron condor, it is important to pay attention to the underlying asset, the premium collected (i.e., the maximum possible profit), the money at risk (position size and worst possible loss), and your willingness to own a market-neutral position. 
·         If you open an iron condor, but have an edge -- perhaps the implied volatility is very high, or there is a good reason to believe that the underlying asset will not be too volatile during the lifetime of the options -- then you are not gambling. However, because you must pay commissions to own the investment, you need a significant edge to place the trade.
·         If you open an iron condor based on a stock market prediction -- bullish, bearish, or neutral -- then you are gambling if your proven track record of predicting direction is poor. You are not gambling when you truly have a proven, successful, track record of predicting market direction. A 60/40 profit/loss record -- after commissions -- meets that need.

PLAIN VANILA STRATEGY FOLLOW UP ; HINDUNILVR BOOKED PROFIT

OPTION STRATEGY GIVEN ON 3 FEB 2016
HINDUNILVR 820 CALL ACHIVED THE TGT OF 36 HOPE U HAVE BOOKED PARTIAL PROFIT (1 LOT)….

PROFIT IN 1LOT IS 10800/-

CONTINUE TO HOLD 2^ND LOT...
NEXT TGT WILL BE UPDATED SOON.....
KEEP READING.....

PLAIN VANILA STRATEGY FOLLOW UP ; HINDUNILVR BOOK PROFIT

OPTION STRATEGY GIVEN ON 3 FEB 2016
BOOK PARTIAL PROFIT (1 LOT)  IN HINDUNILVR 820 CALL @ 35
KEEP READING FOR FURTHER UPDATE......

OPTION STRATEGY FOR FEBRUARY SERIES ; PLAIN VANILA STRATEGY

"BUY 2 LOTS HINDUNILVR 820 CALL @ 18"
FOR TGT UPDATE KEEP READING.............

RBI CREDIT POLICY ; 2 FEB 2016

RBI LEAVES REPO RATE, CRR, SLR UNCHANGED

3 TIPS FOR USING OPTIONS

TATAMOTORS CALL GIVEN ON 29 JAN ACHIEVED 1ST TGT
Options have been misunderstood by the majority of individual investors for as long as they existed. Options have been around for a long time (since biblical times when a clever person bought call options on as many olive presses as possible and reaped large profits when the harvest was huge and people had to come to him to gain access to the presses), but they have been traded on an exchange only since 1973 (when the CBOE opened its doors).
Despite the fears of uneducated investors, these two statements are true: 
·         Options are risk-reducing investment tools.
·         Many option traders adopt very risky strategies using options, despite the fact that far more conservative strategies are available.
TIPS: HOW TO USE OPTIONS EFFECTIVELY WITH LIMITED RISK
1.       DON'T BE GREEDY.
Be willing to own positions where profit potential is limited, rather than unlimited. 
Adopt strategies where losses are capped -- preventing a financial disaster -- and with a high probability of success.
Bullish traders can sell out-of-the-money put spreads.
Bearish traders can sell out-of-the-money call spreads.
In either scenario, do not sell spreads with a tiny premium.
Selling naked options places the seller at risk of a large loss. Remember that markets do unexpected things every so often, and it is important to practice sound risk management by avoiding owning positions that could -- no matter how unlikely -- blow up your account.
Note: It is acceptable to sell naked put options if two conditions are met: (a) You want to own shares of the underlying stock, even if the price plunges below the strike price; (b) you have enough cash in your account to buy those shares, if you are assigned an exercise notice on those puts.
2.      Understand that using options as mini-lottery tickets is a money-losing proposition. It is understandable that you want to dream big dreams. However, when placing your money at risk (every trade comes with some risk), it is important for traders to consider the probability of earning a profit, and not only the size of that potential profit. 
Do not make a habit of buying inexpensive, low-Delta, out-of-the-money options. Sure it is tempting to buy an option for $10 or $20 when there is a chance of scoring a 10-bagger (i.e., earning 10 times the cost of the option), but those options have very little chance of performing as you hope. 
You may believe that the price of a specific stock has a good chance rise from $44 to $57 over the next couple of months, but that is a very unrealistic expectation (unless you have inside information -- in which case it is against the law to buy options). Buying calls with a $55 strike price options is just foolish because such options tend to expire worthless. Sure the loss is small, but the chances of earning money with this strategy are even smaller.

TRADING WITH ADDITIONAL RISK

It concerns risk taking, and although the statement may seem to be trivial, it is far from it. It is an important concept. 
Don’t expect to make more money for taking risk; just know you have to take additional risk to make more money.
If you don’t understand the difference, you should not be taking risk.
One of the basic concepts regarding investing is that there are no free lunches and that you, the investor, must take some risk in order to earn a return on your investment.
If you are a very skilled trader, you may be able to get away with taking very little risk. However, for the vast majority of investors/traders, we must take on additional risk when we seek to earn a higher profit.
I hope that makes sense. If you were able to earn a high reward on your investments with very low risk, then almost every investor on the planet would go after those rewards.
Usually, no further discussion is required because we all understand when many people go after the same investment product, then there are often those who are willing to accept a slightly lower reward. That in turn drives down the overall reward available to investors. To understand why this is true, just imagine a $100 bond that returned $10 every year. You love that 10% annual return. But another investor may we willing to accept less and may bid $105 for that bond. When that happens, you can no longer buy the bond for $100. The price is now higher and the reward is now less. The process continues (i.e., the cost of the bond increases) until equilibrium is reached and no one is willing to pay a higher price.
By the time that happens, the bond could easily be selling for $120 and the annual return would be 8.33%.
THE MAJOR POINT IS THAT EXTRA RISK DOES NOT GUARANTEE ANY EXTRA REWARD. IN FACT THERE MAY BE NO REWARD. Imagine a careless, inexperienced trader adding risk to his/her portfolio with the expectation that it will lead to greater gains.
Using the above bond example, the fact that the business had to pay as much as 10% to sell the bonds initially suggests that the company may never be able to repay the debt. Financially sound companies do not have to pay so far about current market rates when selling bonds. The fact that this company has to pay so much in order to attract lenders says a lot about the high risk involved when lending money to them. It's great to earn $10/year per $100 investment, but if the company defaults and you never get back any of the $100 invested, that is an example of no reward.

OPTIONS ARE NOT STOCKS...!!!!!

"SELL TATAMOTORS FUTURE BELOW 336 TGT 334.5/332.2 SL 338.9" 

"BUY NIFTY 7500 CALL@ 154 TGT 179/194 SL 128"

Whether you are a trader or an investor, your objective is to make money. And your secondary objective is to do so with the minimum acceptable level of risk.

One of the major difficulties for new option traders arises because they do not really understanding how to use options to accomplish their financial goals. Sure, they all know that buying something now and selling it later at a higher price is the path to profits.

But that is not good enough for option traders because option prices do not always behave as expected. 

For example, experienced stock traders do not always buy stock. Sometimes they know sell short hoping to profit when the stock price declines. Too many novice option traders do not consider the concept of selling options (hedged to limit risk), rather than buying them.

Options are very special investment tools and there is far more a trader can do than simply buy and sell individual options. Options have characteristics that are not available elsewhere in the investment universe. For example, there is a set of mathematical tools ("the Greeks") that traders use to measure risk. If you don't grasp just how important that is, think about this:

If you can measure risk (i.e. maximum gain or loss) for a given position, then you can manage risk. Translation: Traders can avoid nasty surprises by knowing how much money can be lost when the worst-case scenario occurs.
Similarly, traders must know the potential reward for any position in order to determine whether seeking that potential reward is worth the risk required.  

For example, a few factors that option traders use to gauge risk/reward potential:

·         Holding a position for a specific period of time. Unlike stock, all options lose value as time passes. The Greek letter "Theta" is used to describe how the passage of one day affects the value of an option.

·         Delta measures how a price change -- either higher or lower -- for underlying stock or index affects the price of an option.

·         Continued price change. As a stock continues to move in one direction, the rate at which profits or losses accumulates changes. That is another way of saying that the option Delta is not constant, but changes. The Greek, Gamma describes the rate at which Delta changes.
This is very different for stock (no matter the stock price, the value of one share of stock always changes by $1 when the stock price changes by $1) and the concept is something with which a new option trader must be comfortable.  

·         A changing volatility environment. When trading stock, a more volatile market translates into larger daily price changes for stocks. In the options world, changing volatility plays a large role in the pricing of the options. Vega measure how much the price of an option changes when estimated volatility changes.

WRITING COVERED CALLS

I prefer to begin discussions about learning various option strategies with Writing Covered Calls because it is easy to understand and because it will feel natural to stock market investors.

First, a definition: A covered call is a position consisting of two parts:

·         Long (that means you own) 100 shares of stock.

·         Short (i.e., you sold) one call option whose underlying asset is that same stock. 

WHY BEGIN WITH THIS STRATEGY?

Although it is not true for every new option trader, most people who come to the options world have some prior trading experience -- specifically, buying and selling stock. Writing covered calls is an extension of that investment strategy. I recommend beginning an options education with this strategy for one basic reason: It is a natural extension of something that most new option traders are already familiar with (buying stock).

That makes it much easier to glide into using options.

This is not the appropriate space to talk about whether an individual investor is better off choosing individual stocks or sticking with index funds or specific exchange-traded funds (ETFs).  I have a deep dislike for traditional mutual funds because of their steep sales charges (loads and/or redemption fees) and excessive management fees. If you are someone who already invests in individual stocks, then the strategy described below is likely to be very useful during the early stages of your options-trading career.

STRATEGY DESCRIPTION

Covered call writing (CCW) is a method for reducing risk associated with owning stock. Stockholders may earn a very large profit when the stock price soars, but they are subject to large losses when the stock price tumbles.

If you prefer to hedge that downside risk, then selling (writing) one call option for each 100 shares of stock owned is an efficient hedging method. 

WHY IS A COVERED CALL A HEDGED POSITION? 

As a reminder, when you sell a call option, the buyer is granted the right to buy your stock (at the strike price) at any time before the option expires.

Therefore, if the stock is trading above that strike price when expiration arrives, the call owner will exercise her rights to buy the shares, and you are obligated to sell. Profits are limited because you cannot sell your stock at any price higher than the strike price as long as you remain short that call option. In other words, you sacrificed the possibility of selling stock at a higher price in exchange for the cash premium that you were paid when selling the call.

SUNK COST AND RISK MANAGEMENT

LOSING MONEY? WHAT NOW?
If you find yourself thinking along these lines [placing a wager that recovers lost money and gets you back to break-even status is so important, that taking extra risk is acceptable], then don’t worry, you are like the majority of people in the world today.
Just remember that though it can be very tempting to take a big risk in order to break even, that risk might put you much further in the hole. Before you take that gamble, think very seriously about the consequences of losing.
If you can consider it rationally, you will realize that it’s much better to stop before you do further damage. Sometimes it’s better to accept a loss and walk away—much like sunk money.
It is very difficult for most people to walk away from a situation in which money has been lost. The temptation to continue playing the game is so strong -- not only for financial reasons -- but because it is psychologically unsatisfying to end the game as a loser. Getting back to break even is almost addictive.
In different language: Consider this scenario: You play poker, bet at the racetrack or invest in the stock market, and find yourself losing $100. You can walk away or continue to play. For most people, the possibility of recovering that $100 is so tempting that they may wind up losing far more money than they can afford to lose -- just in an attempt to recover losses.
This is the important part that is difficult for rational people to recognize: When people make an investment, earning $100 has a certain amount of pleasure associated with it. However, if they first lose $100, then earning $100 is far more satisfying -- despite the fact that it has the same financial value. "Not losing" is more satisfying than "winning" -- and that may lead to taking more risk than is prudent.
SUNK COST
When money has been lost and cannot be recovered, there is nothing that can be done. That is the sunk cost.

THE APPEAL OF BINARY OPTIONS

There is a type of option that is not offered by the "regular" options exchanges (such as CBOE or ISE). It's the binary option. 

Binary options are very easy to understand. The gambler (sure, there is an effort to describe players as stock-market investors, but trading binary options is gambling) places a bet. It works like this: Some future event will either be true or not true -- and you can take either side of that bet.

Another way to state the gambling proposition: Your wager will be worth $100 or $0 when the option expires. There are no other choices. If the event comes true, those who bet on "come true" can cash in their wager for $100. Those who bet it would not come true lost, and their "investment." is worth $0 (i.e., it expires worthless).

For example: "The S&P 500 Index will be up more than 6.00 points today." In the morning, before the market opens, let's assume that the futures markets are neutral. In that scenario, it is more likely than not that the proposition will turn out to be false because the index rises by more than 6 points less than half the time, or "not true" when the day ends. Thus, people who want to wager that the proposition will come true will get a little bit better than even money odds. Those who bet it will not be true must accept odds of less than even money (i.e., they can win less than $1 for each $1 wagered).

Binary options can also be used for longer-term situations, such as:

• Donald Trump will be elected President of the USA in 2016
• The stock market will close lower on Dec 31, 2016 that it did on Dec 31, 2015

• Hillary Clinton will be elected president of the USA in 2016.
• The Chicago Cubs will play in the World Series in 2016.

It's very easy to understand how binary options work. Most people like to predict things. When you have a strong hunch, it is tempting to place friendly bets with friends.