Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Why Options Are Trickier than Stocks


Any why risk managment is critical.

When trading stocks, the idea is to buy stocks that are going to move higher, or as Will Rogers said: "Don't gamble. Take all your savings and buy some good stock. Hold it till it goes up, then sell it. If it don't go up, don't buy it."

The good news and the bad news about option trading is that it's much more involved than trading stocks.

Option prices don't always move as anticipated because many factors come into play when options are priced. As I recently discussed when talking about measuring risk using the Greeks, one factor that may drive the price of a call option higher (rising stock price) may be offset by other factors, such as the passage of time or a decrease in the option implied volatility. Understanding how options are priced is essential to trading options successfully. It depends on more than whether the markets are heading higher or lower.

That's the reason risk management is so important when trading options. The idea behind this post is to help rookies understand that strategy selection isn't all there is to trading options. It's easy to hear someone rave about the profits he/she earned by writing covered call or owning iron condors. But the truth is, such successes are often followed by significant losses, unless the investor/trader understands how to manage the trade.

Anyone can write a covered call and profit most of the time. Only the person who understands risk management can survive serious market declines. Anyone can own iron condor positions. In fact, it's a strategy that's touted far and wide on the Internet. There are many advisors who will be happy to sell you costly lessons on how to trade iron condors, and even more who will take your cash, and for a measly 20% of the profits, will trade iron condors for you. (For one iron-condor strategy, see Professor Adam Warner's recent take on First Solar (FSLR), entitled Will Options Be Eclipsed?.

But the investor who understands how to manage risk can trade those positions without paying large sums to others for either trade execution or costly lessons. Managing risk -- and by that I mean keeping all losses under control -- is the single most important contributor to your long-term success as an option trader.

It's okay to take small losses - in fact, it's inevitable. But eliminating large losses means you will never go broke. When you trade spreads that have a high probability of being profitable, you'll win most of the time. Couple those profits with small losses and you achieve success.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.






Featured Videos