One of the great things about Options is you know exactly how much your Maximum Loss can be with every trade. You buy a Call for $400, and the most you can lose is $400. With a $20K account that trade risks 2% of your principal, and with a $10K account it risks 4% of your principal. But what about Total Account Risk? How many of these -2% or -4% trades should one have on at once? One ET Poster told me he only risks 10% of his principal at any one time. I'm currently risking 80% of my principal, but will be cutting that down to 50%. How does everyone else handle this?
How does everyone else handle this?? I use diversification to help manage risk. e.g. If I have a mix of bullish and bearish trades (e.g. bull call spreads + bear put spreads etc) Plus I diversify by sector: utilities, retail, metals, financial etc. plus add in positions on inverse ETF's like SH Then the effect of wide market swings will be much less. If you are not playing direction but are looking for time decay then make your portfolio market neutral...then you won't care what the market does.
And the common one line description of options reinforces that MISCONCEPTION. "Call options give the buyer the right, but not the obligation, to purchase an underlying asset." Perhaps you should read this post. http://www.elitetrader.com/vb/showthread.php?s=&threadid=51251
Why? Can you go be a snide little Troll somewhere else please too? (Though you're probably the same person, right?) Thanks.
No comprende. How can I lose more than the $400 premium I paid for the Call? If it's OTM at Expiration it Expires Worthless, and that's the end of it.