You should know the risk of every trade before you make it!
If that risk is too large for your comfort or financial situation, you shouldn’t be trading it. If you are relying on each trade to pay your bills, fund a child’s education account, fund your retirement, you shouldn’t be trading it. Not all trades are appropriate for your entire life savings. You should only be using funds that you would consider to be at-risk. These funds should be a reasonable portion of your total trading portfolio.
Remember, the best way to manage your investments is to use multiple positions in multiple sectors/industries and multiple security classes to properly diversify your money. If any one bad trade could significantly dent your investment capital, you are not diversified well enough. Options are a great way to invest and to diversify your trading positions – but stock options trading with your whole nest egg is not appropriate for just about anyone.
Be sure to consult an investment professional before implementing a new strategy. Discuss the consequences of your trading and consider the maximum draw-down that can occur and if your allocations are balanced well and are diversified enough.
[tags]trading risk, options trading, trading for retirement[/tags]
david
i was looking at a friends options portolio, and running some tests to see what losses could be. i was looking at the delta’s, and as the price was going down the delta was becoming a larger and larger positive number. does this mean he was short puts?
thank you
Greg Zerenner
Hi David:
It depends what system you were looking at for the delta. In general, the delta will increase toward 1 for a call option when the stock price rises and it will decrease toward -1 for a put when the stock price falls. Some systems show the delta as a positive number all the time and just assume that you will know if it is a put or call option.
On poweropt.com, we show the delta as positive for call options and negative for put options.
So, if you friends position was a positive delta and getting larger as the stock price rose, I would think that is a long call position.
Since the positive delta was getting larger for a decrease in stock price, that would mean it was for a put option, I am not sure if you could tell that it is short or long, unless the provider you were reading shows positive deltas for short puts and negative for long puts. I have never heard of this before.