{"id":6284,"date":"2015-02-02T18:11:50","date_gmt":"2015-02-02T18:11:50","guid":{"rendered":"http:\/\/www.optionselitepicks.com\/?p=6284"},"modified":"2016-04-25T10:49:58","modified_gmt":"2016-04-25T14:49:58","slug":"basic-options-risk-management","status":"publish","type":"post","link":"https:\/\/www2.stockmarketwatch.com\/learn\/options\/basic-options-risk-management\/","title":{"rendered":"Basic Options Risk Management"},"content":{"rendered":"<p>A basic rule of thumb with options trading, is to play with what you are willing to lose.\u00a0 As opposed to stock trading where you might be willing to lose 4-6% of your investment per trade.<\/p>\n<p>Does this mean that options are too dangerous and risky to trade?\u00a0 No! \u00a0They just have to be approached in a certain way for consistent profitability.\u00a0 I personally see options trading as a better way to manage risk and maximize your portfolio&#8217;s gains.<\/p>\n<h2>Let&#8217;s look at a example of an Options Trade vs. a Stock Trade.<\/h2>\n<p>In this example, we will have 2 people trading the same stock.\u00a0 One will buy the stock itself and the other will use call options.<\/p>\n<p><strong>The sample stock is XYZ trading at a price of $30\/share.<\/strong><\/p>\n<p><em>Jim Stocktrader<\/em> buys 1000 shares of\u00a0 XYZ, which costs him $30,000.<\/p>\n<p><em>Joe Optionsguy<\/em> buys 10 contracts of XYZ, which exposes him to the same amount of shares. (Each contract controls 100 shares)\u00a0 The price per contract is $1.00.\u00a0 So, Joe&#8217;s investment cost is $1,000.\u00a0 <strong>(Therefore, he&#8217;s putting $29,000 LESS at risk than Jim Stocktrader)<\/strong><\/p>\n<ul>\n<li>The most <em>Jim Stocktrader<\/em> can lose on this trade is <strong><strong>$30,000.<\/strong><\/strong><\/li>\n<li>The most <em>Joe Optionsguy<\/em> can lose trade is <strong>$1,000.<\/strong><\/li>\n<\/ul>\n<h3>SCENARIO 1:\u00a0 Stock Goes Up +$10<\/h3>\n<p>If the stock went up in price before the expiration of the contract, this would of course, be a win for both traders.\u00a0 However, let&#8217;s take a look at the numbers.<\/p>\n<ul>\n<li>Jim Stocktrader <span style=\"color: #800000;\"><strong>risked $30,000<\/strong><\/span> and made <span style=\"color: #339966;\"><strong>$10,000 <\/strong><\/span>a percentage gain of <strong><span style=\"color: #339966;\">+33.3%<\/span><\/strong><\/li>\n<li>Joe Optionsguy risked only $1,000 and made <strong><span style=\"color: #339966;\">$9,000<\/span><\/strong> a percentage gain of <strong><span style=\"color: #339966;\">+900%!<\/span><\/strong><\/li>\n<\/ul>\n<p>A great win for both, but the options guy put much less at risk and had almost the same gain.\u00a0 That&#8217;s a big win for options traders.<\/p>\n<p>&nbsp;<\/p>\n<h3>SCENARIO 2:\u00a0 Stock Goes Down -$10<\/h3>\n<p>If the stock goes down in price before the expiration of the contract, this would be a loss for both traders.\u00a0 Let&#8217;s take a look at the numbers.<\/p>\n<ul>\n<li><em>Jim Stocktrade<\/em>r <strong>risked $30,000<\/strong> and <span style=\"color: #800000;\"><strong>lost $10,000 <\/strong><\/span>a percentage gain of <strong>-33.3%<\/strong><\/li>\n<li><em>Joe Optionsguy<\/em> risked only $1,000 and <strong>lost $1,000<\/strong> a percentage <strong>loss of -100%<br \/>\n<\/strong><\/li>\n<\/ul>\n<p>Having only risked $1,000.\u00a0 <em>Joe Optionsguy<\/em> shows the power of options trading once again.\u00a0 While the &#8220;-100%&#8221; looks scary,\u00a0 <em>Joe Optionsguy<\/em> played it right and walked away only losing -$1,000 compared to <span style=\"color: #800000;\"><em>Jim Stocktrader<\/em> who lost 10 times as much (-$10,000)!<\/span><\/p>\n<p>You can see from the way this played out, when traded properly, options trading can give you the opportunity for very large gains, while protecting you from large losses.<\/p>\n<p><strong>What&#8217;s Next?<\/strong><\/p>\n<div style=\"font-size: 14pt;\">\n<p>Start Reading About the Different Types of Option Trades \u00bb<\/p>\n<ul>\n<li><a href=\"http:\/\/www.optionselitepicks.com\/category\/options-trading-tutorial\/bullish-option-strategies\/\" target=\"_blank\" rel=\"noopener\">Bullish Option Strategies<\/a><\/li>\n<li><a href=\"http:\/\/www.optionselitepicks.com\/category\/options-trading-tutorial\/neutral-option-strategies\/\" target=\"_blank\" rel=\"noopener\">Neutral Option Strategies<\/a><\/li>\n<li><a href=\"http:\/\/www.optionselitepicks.com\/category\/options-trading-tutorial\/bearish-option-strategies\/\" target=\"_blank\" rel=\"noopener\">Bearish Option Strategies<\/a><\/li>\n<\/ul>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A basic rule of thumb with options trading, is to play with what you are willing to lose.\u00a0 As opposed [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center 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