It means you should pay extra attention to possible downsides and think about scenarios to handle those.
Let's get down to the real nitty-gritty part of option trading. The learning curve of option trading means your account has to survive while your learning. Capital preservation is the number one key that allows a new option trader to have longevity. Regardless of what trading strategy or system you use, its equally important to have a comprehensive plan that includes: 1: A Buy Limit entry price. 2: A Sell Limit exit price. 3: A Stop (if things go wrong). Let's say you start out your option trading adventure with a hypothetical $10K account. You want to select a broker that has semi-automated trading and extremely low commissions. Semi-automated "Bracket Orders" are perfect for maintaining control of a trade without constantly having to attend to the trade (it removes the human element of emotion). Example: 10% of $10K is $1,000. $1,000 divide $200 per contract = 5 contracts XYZ option: Quantity: 5 Buy Limit: 2.00 Sell Limit: 2.50 (+25%) Stop: 1.50 Maximum Profit: +$50 x 5 = +$250 (+25%) Maximum Loss: -$50 x 5 = -$250 ( -25%) The Maximum Total Account Risk for this trade was $250 (stop) divide $10,000 (account) = 2.5% Risk of Total Account If you always use that formula or something similar, that means you would have to lose 40 consecutive trades to blow out your account! (40 x -$250 = -$10k) To make money with that formula you need to have a "minimum" Win/Loss Record of 66% (win every 2 out of 3 trades). Example: 12 Trade Month: 8 wins at +25% = +$2,000 (8 x +$250 per winning trade) 4 losses at -25% = -$1,000 (4 x -$250 per losing trade) Monthly Gross Profit: +$1,000 (+10% total account gain) When you consider commissions, fees, and fed and state taxes, it becomes obvious why you need a "minimum" Win/Loss record of 66%. If you cannot hit W/L: 66%, your profit levels (Sell Limit) have to increase to accommodate a lower W/L. You can work the math on the formula for various Profit, Stop, & W/L ratios. Jeff
Personally I look at support and resistance and worse case scenario then trade accordingly-when vol is very low I have nett positive delta put strategies,and wait for the market to tank,hopefully 2-3 times a year,after which you can rely on QE and the plunge protection team to buy the market. Remember the market rises on lies and BS and will only drop with the truth,and liars get found out regularly -and I thank them every day