Market Overview

Options Do Not Have to Be Risky

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 I am by nature a risk averse person. That may seem unlikely for someone such as myself who spent most of their adult life trading options but it is so. In fact, one of the myths about options is that they are by their very nature risky. That is just not so. Options can be as risky or conservative as you like.

Unless one is a professional options trader, their options trading setups should have specific and well-defined risk. I do not advise being naked options short for the vast majority of people out there, even net options short as in a ratio spread. Oh, and by the way, a covered write (long stock, short call) is exactly the same as being naked short puts and even though I have written about that before, it bears repeating.

Part of my entire “simplify and demystify” working method of trading options is to always and at all times know exactly the most one can lose on any particular trade or strategy. In my instructions I always ask my option students  to tell me what is the maximum risk, what is/are the break even points and what is the maximum profit. If the maximum risk is undefinable then I teach that the trade is not worth doing.

Hey, on a quality of life basis if nothing else. Who needs a position that carries a risk, however unlikely, that could blow up your entire portfolio if it went wrong? Life's way too short for that kind of worry, eh?

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Options Markets Trading Ideas

 

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