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Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term by Wayne Ferbert, Jay Pestrichelli

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19. Risk Graphs: A Picture Is Worth a Thousand Dollars

“You’re gonna need a bigger boat.”

—Police Chief Martin Brody (played by Roy Scheider) in Jaws (1975)

Sometimes it’s easier to understand your risk exposure if you can visualize it. When Chief Martin Brody, played by Roy Scheider, saw the size of the shark they were up against in Jaws, he immediately knew that they’d underestimated the risk they took. Visualizing your exposure through risk graphs will provide an easy way to understand your risk levels.

It’s worth repeating that Options are the single most effective hedging technique available to the average individual investor. Options enable the creation of effective counterbalances while leaving room for the original asset to appreciate ...

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