short an otm call/put strike 1) buy a futher otm call/put strike, making it a short spread 2) place a gtc stop loss order to buy at market, covering the naked short call/put if underlying drops below certain price level. which is the better risk control strategy and why?
3) only have as much money in your trading account as you're willing to lose. put the rest in separate cash account at a different financial institution. #2 may not work well if the market gaps significantly against you at open. if you have portfolio margin, combining 3 with 2 gives you the best rom with limited risk. with reg-t, i can't tell you what's best of the 3 because it depends on how you trade and your commissions. but #2 alone is worst in all cases.
IMO, options are ALL about the underlying. The average options "player" is destined to lose the spread and commissions. You need to formulate a plan as to how you are going to profit from the underlying before you can decide how you are going to "invest" in your position. Many books act like you just have to pick a strategy or two or three and just learn how to "adjust" them. IMO, "adjustments" just leads to giving up more spread and commissions. Joe
2) is slightly better because you're offsetting the trade instead of potentially increasing the overall loss by attempting to "trade around" it.
All of your advice to date has been wrong, so why make an exception here. You theoretical knowledge is very inadequate.
there are many ways, not 2 of this 2 1) is better as it gives you defined maximum risk 2) will expose you to almost unlimited risk as the gap on opening could be of any size. it will not drop below zero though
Unless it's a stop limit order, there is a guarantee that it will get filled. There is, however, no guarantee that it will get filled at your trigger price. If the stock gaps through your price and IV gaps up, you could wind up losing a lot more than you expected. Spreading or otherwise hedging with another option is the only sure way to limit your risk.