Risk Realities

Discussion in 'Options' started by xraptorx, Sep 15, 2009.

  1. xraptorx


    Hello guys,

    I have been paper trading covered calls for last 2 months and just started paper trading credit spreads. On some posts here awhile back and elsewhere, I see comments that these type of options are risky because you must have a feeling about market direction (either going up, going down or staying within a range).

    Now I am certainly quite new and still reading my books to learn, but all options are risky in that sense. There are some very complex options out there, but I wanted to ask here:

    1. What are the least risky type of options?

    2. What are the easiest options to learn and then trade (from option selection to position management)?

  2. mike007


    Well for one, most of the option spreads are defined risk. You know your risk before you get in a trade. If you sell i $1 vertical, you know your risk. You just have to be willing to accept that risk if the trade moves against you.

    2. I think that any of the 2 legged spreads are easy for beginners. Verticals and then maybe learn Calendars. Verticals are the base for condors then calendars will give you a base for when you want to learn diagonals and others.
  3. spindr0


    Every option position is risky if there's a possibility of losing money.

    As for spreads being risky because "you must have a feeling about market direction (either going up, going down or staying within a range)," apart from the quantitative risk, is that any different than a covered call?

    FWIW, you'd be better served by learning what each option position achieves and then selecting the one that best fits what you are capable of identifying in the market (timing, selection, money management) as well as your risk tolerance.
  4. dmo


    Agreed. Option spreads offer defined risk, but then so do outright long options.

    The reason I would trade a spread rather than an outright is because my strongest opinion is that two things will move together or move apart. The spread is not a maneuver to lower risk, it is a way of directly playing what I think is the most favorable risk/reward scenario.
  5. spindr0


    I'm not going to post a reply mentioning that by lowering your risk via a spread you improve your risk/reward scenario :)
  6. 1) There are only two 'types' of options:
    Puts and Calls.

    Obviously that's not what you meant to ask.

    2) Ease of trading is not important.

    What is important? You must understand how options work and you must understand the rationale behind trading a specific option strategy.

    For each type of spread you should know: What do you have to gain? What do you have to lose? What must happen to the price of the underlying stock for you to make a profit? What can go wrong? etc.

    Ease of learning and ease of trading is not good enough.

    Here's a list of the strategies I suggest you learn: Then you can decide which, if any are appropriate for your personal situation.

    Covered call writing
    Selling naked puts
    Credit spreads
    Iron Condor
    Diagonal (and double diagonal) spread