Tuesday, November 1, 2016

Controlling Risk in Trading Options

Trading is not complicated. All you have to do is wait for a really high probability opportunity and swing it. However, in reality it's not as easy as it may sound. For one, what part of capital one should use per each trading opportunity? What kind risk measures to take? How to determine the price target objective?

Al these questions are important in of themselves. But, the one issue takes the precedence over the others. It's the risk.

Any trade, however profitable it might be, without taking a risk measures, it's not sensible to take it.

But, how to control risk? What are the ways to take risk under control in taking a position?

Size of a Position

We agreed that for any one trade, in considering whether to take it or not, we should first calculate the approximate amount of risk per this given trade (I am deliberately leaving technical matters aside, as they might confuse readers). After admitting the risk, we can proceed with structuring our trade..

To achieve our goal, we can take as small position as we feel comfortable. This concept perfectly works in the options trading. Because, in options (if we trade directional call or puts), we can take the size of a position as a risk per trade. Therefore we can take the total size as a sum we can feel comfortable losing.

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