Gain the Professional Trader's Edge by Understanding Risk.

10/26/09

SHARPEN YOUR TRADING EDGE WITH OPTIONS

Trading options is NOT about trading risk for reward straight-up. What you should be looking for is to gain a professional trader's edge. You should be seeking to reduce risk through careful selection of investment opportunities and, at the same time, capture bigger returns. There will be losses. What we seek to do is shift the balance of winners to losers to favor strong, profitable portfolio returns.

Any investing carries a certain amount of risk. Options investing comes with greater risk. Before you dive into the world of level 1, 2 or 3 options trading, you should make every effort to understand the risks.

Without going into a discussion of the Greeks (e.g., delta, theta, vega), the risks described below are what we believe to be the most common in options investing.

The principal drivers of options value are changes in the price of the associated stock, changes in volatility and the passage of time. When you open your trading account with your broker, make sure you read the risk disclosures associated with gaining the broker approvals for options trading.

There are three primary risks to take under consideration when initiating any options trading position, which we'll discuss below.