Trading Risk management

It’s a well known fact that trading involves risk. Many people have been warned about the nature of the markets, and sadly, many have also used this fact as a means to stay away from trading. Risk, while it is present in trading, is also present in each and everyone’s lives. Everywhere you look, there is risk involved, and somehow we all managed to survive. Thus, this means that we all have our own risk management techniques that enable us to cope with the various risk that everyday living presents to us. This is exactly the same with trading risk management.

While trading involves risk, it is not something that people should stay away from completely, as trading is a great way to making great money in the markets. In order to thrive in the markets, the first thing that has to be in place is your trading risk management. There are a few areas in trading risk management that you would need to look at. Here are the important ones as a trader:

1. Risk Assessment
   Before entering into a trade, know how much risk is involved with what you are trading. Each trade would involve varying degrees of risk. There are strategies that are more conservative than others, and hence can be deemed to have lesser risk. You need to be comfortable with the risk before getting into a trade. One important thing to remember is that when you enter a trade, you cannot back out until you close out your position and exit it with either a profit or loss. Hence, you need to ensure that you have assessed the risks involved and are willing to take it.
2. Position Sizing
   When entering into a trade, one other aspect that you need to think about is the size or the amount that you are willing to risk for a particular trade. There are general recommendations on how much you must risk on your capital for a specific trade, but it is up to you to know if you are comfortable of risking a specified amount. Some say to risk only 5% to 10% of your capital, but it can vary depending on who you talk to and what your risk tolerance and trading objectives are.
3. Stop-Loss strategy
   If you are in a trade, you need to work out at what level you would like to exit if the trade goes against you. The nature of trading is that we all try as much as we can to get as close to accurate picture of the market, but no one has a crystal ball and we can get it wrong. In order to survive in trading and make money, you need to learn to cut your losses and make your profits run. By putting in a stop loss measure, you are implementing a trading risk management strategy that guarantees you to get out of a trade when you’re not comfortable with the way things are going anymore.

The three items above are the essential concepts for trading risk management. If you would like to learn more about trading and trading risk management, you can count on the people at Planet Wealth to offer you fantastic advise on how to trade the stock market successfully. Their wealth of experience in trading the markets has given them a great knowledge on how to do trading risk management.

Options Trading On Wall Street

To continue the post on How To Trade Options, let’s first recap what has been discussed in Part 1. There are two types of options that you can trade: Call Option and Put Option. A call option, when bought, gives the holder the right but not the obligation to buy the underlying stock at an agreed price (strike price) on or before the expiry date. A put option, on the other hand, gives the holder the right but not the obligation to sell the underlying stock at an agreed price (strike price) on or before the expiry date. The seller of each one of them naturally has the opposite option (i.e., Call Option seller will be able to sell the stocks, and Put option sellers will be able to buy the stock).

Options Trading Strategies

Having explained what call and put options do, let’s explore further on how to trade options by explaining what we can then do to these fantastic financial instruments. Here are some point you might want to remember when trading options:

• Buying Options (Call or Put) – The buyer has to pay a premium for holding on to the option. The price of a premium is dictated by the market, and is based on a formula, which will be discussed at a later post. For now, let’s just take that there is a formula that the market calculates to come up with the premium price.
• Selling Options (Call or Put) – The seller of the option receives a premium for exposing himself to the potential risk of either losing his stocks or having to buy the stocks at the strike price on or before the expiry date.

There are a number of ways on how to trade options. You can trade options:

• singularly on their own without owning the underlying stocks, or
• a combination of options without owning the underlying stocks
• you can trade it with owning the underlying stocks themselves.

“Naked” Options

Trading options singularly without owning the underlying stocks are called “naked options”. This strategy means that you only buy a put option or sell a call option on its own without owning the stock. It is called “naked” because you are exposed to the possibility of getting exercised on the option without any backing of the actual stocks to sell. This is a very risky strategy when looking at how to trade options, and one that should be taken with extreme caution. While this can be one of the most profitable ways to trade options, this strategy is not advisable for beginners. You need to be able to monitor this type of strategy closely, and to learn your options pricing model very well to be successful at this.

Credit Spreads

Trading options in combination without owning the underlying stocks are called “credit spreads”. Generally, this strategy uses either a combination of a buy and sell of a call option, OR a buy and sell of a put option. Essentially, the idea is that the premium you receive from selling the option will be much greater than the premium you have to pay for the buy option, and thus giving you what is called a credit or the difference between the 2 premiums. This credit is what you earn if the options expire worthless (i.e., you are not exercised by expiry date of the options). I will delve into more detail on this on succeeding posts, so look out for it. This can be a great strategy for both bullish and bearish markets, and also when you can’t afford to buy the underlying stocks to trade. The other leg of this combination of options minimizes your risk when getting exercised. However, there is still risk involved, and further knowledge needs to be acquired to trade this strategy.

Covered Calls And Puts

The best way to trade options is to trade it with the possession of the underlying stocks. This strategy is called covered options (more commonly referred individually as covered calls and covered puts). This is because owning the stock guarantees you that you are able to fulfill your commitments to the options trade, should you get exercised on or before expiry date. This is a great income generation strategy for your stocks when used properly. You can buy the stocks and then sell a call option with a strike price that is at a higher level than your purchase price, and then receive a premium for it. More details will be covered in the succeeding posts.

Options Trading Education

All these options trading strategies give you a rough idea on how to trade options and make money from it. Further learning should be undertaken to fully understand the nature of these trading strategies. It is important to have the right education in options trading in order to become a successful options trader. The educational materials and resources at Planet Wealth are awesome for both beginner and advanced options traders, as it covers a wide range of topics on how to trade options and it goes into depth on each topic. The great thing about Planet Wealth is that they are very helpful if you have any questions on options trading, and they also have experts who can hold your hand while you first start with your options trading journey. They also only recommend trades that they themselves are getting involved in with their own money, so it’s very reassuring that they have the best interest at heart when it comes to your success in options trading. Moving forward, I’d recommend taking Planet Wealth’s educational package to take those steps in becoming a successful options trader.

Options Trading Types

Options can be classified to 2 types: Call option and Put option. A call option entitles the holder of the option the right but not the obligation to buy the stock at an agreed date for an agreed price. A put option, on the other hand, entitles the holder of the option the right but not the obligation to sell the stock at an agreed date for an agreed price. The holder in this case is the buyer of the options contract. Therefore, how to trade options of each type would be as follows:

Call Option: Buy – means that you are wanting to buy the stock at a specified date for a strike price

Call Option: Sell – means that you are wanting to sell the stock you own at a specified date for a strike price

Put Option: Buy – means that you are wanting to sell the stock you own at a specified date for a strike price

Put Option: Sell - means that you are wanting to buy the stock at a specified date for a strike price

When you buy an option, you have to pay a premium to the seller of the option. Regardless of whether you are able to exercise the option (to buy or sell the stock), the premium is held by the seller of the option. This premium amount is determined by the market price, and has some mathematical formula used to calculate its value. The formula is not that simple, but there are key factors which contribute to the pricing of the options premium. This is not something for beginners to look at on how to trade options. I generally don’t look so much into the pricing model, as it can be complicated, but it pays to know the concepts. If you would like more information about the option pricing model and how to trade options by looking at these figures, it is explained better with Planet Wealth’s education program.

For now, you would have hopefully learned how to trade options in terms of the 2 types of options. Watch out for part 2 for the next installment of how to trade options.

Options Trading is one area that not as many people know when it comes to trading and the financial markets. It is not as common to trade options as it is to buy stocks or shares of a company and make money from it. Yet still, there are a few who have learned how to trade options and become successful in making a consistent income from it. However, option trading requires more knowledge in order to be successful. It is not as simple as putting your money aside and hoping for it to grow in the long run. This website will offer some option trading tips and strategies to make an income from trading options.

Before you step your toes into option trading, the first thing that needs to be addressed is to get back to basics and understand what an option is, and the terminologies that come with option trading. The option trading tips will only be useful once we understand the basics and then start developing knowledge on the different ways to trade options. I started out learning option trading this way, and I believe that if you are to make money using option trading strategies, you need to know the basics and build your foundations right.

Option Trading Terms

When trading options, you are in fact dealing with contracts. Essentially, an options contract is an entitlement to buy or sell a certain stock or share at an agreed price and at a certain specified period. Before further delving deeper into the details of options contract, let us define certain words that have been mentioned in the above statement:

• Expiry Date – the agreed date on the options contract
• Strike Price – the agreed price at which the stock is to be bought or sold

Options contracts give the holder the right but not the obligation to buy or sell the stock of share on or before the expiry date at the strike price. This means that depending on the type of options, the holder of the contract may buy the stock or share if the share price hits or goes above the strike price, or sell the stock if the share price hits or goes below the strike price. If it happens that the holder of the options contract has to buy or sell the stock or share, this action is called “exercise”.

Why Trade Options

There are many reasons why traders and investors would trade options contracts. Two of the most common reasons are:

1. Stop-Loss – Options are used to protect assets (stocks in this case) from the possibility of the stock price dropping lower than what the stock holder is willing to risk. This forms as a stop-loss measure for the stock trader, as this will ensure that he or she doesn’t have to sell the stock any lower than the strike price regardless if the existing price of the stock at the time is lower.
2. Extra Income – Options can be used to generate extra income from the stock held by the owner. When selling an option to another party, the seller receives a premium for risking the possibility of losing his or her stock holdings. This premium is kept and earned by the seller of the option, regardless of the option being exercised or not.

Each market or country will have mostly similar concepts when it comes to options trading, and there will be slight differences with each one (i.e., the American options trading requires 100 shares of a stock to form a contract, whereas the Australian options trading requires 1,000 shares of a stock to form a contract). Learning these terms and strategies can take time, but with the help of a fantastic financial education and investment company like Planet Wealth, your learning and involvement in the options trading arena will be accelerated through their wealth of knowledge and experience. More of these basic option trading tips in the upcoming posts, so watch out for the next series of option trading tips!