Gain the Professional Trader's Edge by Understanding Risk.

10/26/09

NO. 2 RISK: PRICES CAN MOVE VERY QUICKLY

Because options are highly levered investments, pricing moves very fast. Options pricing, unlike stocks, can move by giant amounts in minutes or seconds rather than hours and days.

Small movements in a stock can translate into big movements in the underlying options. So, how can an options investor make money unless they watch the options pricing in real-time all day long?

You should look to invest in opportunities where you believe the profit potential is so robust that pricing by the second will not be the key to your making money.

In other words, expect to go after such large profit opportunities that there will be plenty of reward if you are not precise in your selling.

Additionally, do all you can to structure the options purchase using the right strike prices and expiration months so that much of this risk is reduced.