Options Risk Management – How Do I Manage Risks in Option Trading?

Like all forms of investment, risk is also tied to trading opportunities. But this risk can be handled with some basic knowledge.

It examines the risks associated with the various options:

1) Price uncertainty –

No one can say in absolute terms where the stock price is. You do not know Johnson & Johnson (JNJ) will be higher tomorrow, a week or a month. This uncertainty surrounding pricing poses a risk.

2) Timing Risk-

Options – e.g. Bonds and futures – There is an expiration date. The holder of the contract must decide whether or not to purchase or sell the underlying instrument on or before that date. Gaining the right to timing is essential because the amount of profit or loss depends on when they are using this option.

3) Volatility risk –

In addition to price and timing risks, there is another risk-volatility. This is a measure of how the price of a particular option can change over time. During the high volatility period, the fast price movement on the underlying instrument is noticeable, which affects the price of the option strike.

You have to think – with all these risks, how to make the right choice? The irony is that the possibility itself is a form of risk management. The capital transfer offered by the options helps you manage your exchange rate risk by protecting your principle. Let's have an example:

Suppose you want to buy 100 Apple shares (AAPL). With the current $ 100 market price it costs $ 10,000 (without the agent contract). That's a lot of money for novice investors. But with options, you can control 100 shares by buying one of the options offered by Apple. Depending on the price of the strike, less than a fraction of the ownership cost of the shares can control the 100 shares. If you bought 100 shares, you can lose more money if the stock falls dramatically. However, if you have used options, you may only lose the option bonus.

Another way to address this risk is to identify and quantify different risks, that is, the measurement of delta, theta and vega among others.

Source by sbobet

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