Out of all the financial instruments, options seem to be the one that strikes the biggest spike in nervousness from most investors. Everyone seems to have a story of someone who lost a packet. So is options trading dangerous?
I don’t think so!
Ok easy to say but how do you back this up? Think about driving a car. Each day we get behind the wheel but in reality this a proven safe form of transport. That said, there are accidents each day but compared to the volume of safely completed journeys, this is a tiny fraction, yet the one we hear the most about. Consider for a moment, the local newspaper running a story about 70,000 drivers who had a successful day driving, without incident and got home safely. Hardly an exciting read, compared to “drunk and texting driver creates mayhem in Main Street!”
Ok, so how can you make trading safer?
Just like driving a car, to keep things safe, there need to be some skills learned, rules followed and a bit of common sense!
Most traffic accidents are caused by either speeding, drunk driving or running a red light.
Speeding, in the trading space, could be considered similar to chasing a higher return. Common sense would tell us that looking to make 30-40% on a trade would be a sizeable return and, on the back of that, come with a decent chunk of risk. However, when it comes to the possibility of making money, people are more influenced by the potential return than the potential risk.
Put this another way, many less experienced traders will chase that higher return, fuelled by optimism and greed, only to be on the receiving end of the market, blown up account and of the belief that options don’t work!!
Deep down inside, we all know that those “4th quarter Hail Mary” trades very really work out and, instead of covered in glory, we get covered in losses.
Yet with some practical skills and, let’s face it, common sense, building a strategy that generates smoother, less risky, more consistent results will help you get the job done – whether that is in your 401k or your kids’ college fund.
DUI in the stockmarket!
Getting pulled over and arrested is not something that sounds like a pleasant experience. The fix is dead simple – don’t drink and drive! In the stock market things are much the same. If you want to have a pleasant outcome and make money, the fix is also just as simple.
Having flexibility in your trading arsenal is key. Markets and market conditions change and, if you are a one size fits all trader, trying to force your strategy on the market will lead to a particularly certain outcome, failure!
Through some specialist knowledge and being open minded, a trader can create opportunity from practically anything the market has to throw, through using options.
Running a red light in the trading space
For us traders, running a red light is the same as having a trade without risk management. It is just plain stupid, and irrespective of what kind of hurry you are in, as the consequences are horrific.
On every trade we recommend risk management. This is an essential component in preserving your trading capital, keeping you in the game for longer and, ultimately, being able to capitalise on more opportunity.
On options trades, we always have a stop loss in place – ensuring that even if our view is wrong, we get out for minimal damage, something which makes a lot of sense in the cool light if day.
After all, for some people, it is more important to be shown to be right, than it is to make money and they most definitely are not the same thing!!!
To some people, through perhaps a horror story they have heard, options trading may seem risky. In reality, it is not. In fact with some training and education it will be a very safe for you. Again, returning to our car story, when you hop in and turn the ignition on, are you overwhelmed with anxiety? Probably not, as you have no intention of speeding, drinking or running a red light. After all, the car is safe. In the trading world, options when used correctly, are just as safe.
You get to determine your outcome, manage risk, adjust your strategy to suit the market and, ultimately dictate your profitability. In short, you are in control of all the variables relating to the trade.
The difference between this and driving is that while in the car you may be in control of your factors, you have no control over other road users who may be happy to speed, drink and run red lights. Against that, you can only hope and pray. In t he options market that is not necessary because you are in control of your own outcome!
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