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Essential Option Strategies by J. Kinahan

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Chapter 17The Close

You have learned a lot about options! You know the basics of puts and calls; what variables affect options prices; and how different strategies can be used to express bullish, bearish, and even neutral outlooks relative to underlying securities.

Some strategies, such as protective puts and covered calls, are extensions of the buy-and-hold investing that you were probably already familiar with. Advanced strategies, such as butterflies and calendar spreads, are more complex and best suited for more sophisticated investors with previous options trading experience.

Regardless of the experience level, the strategies used, or whether an investor is bullish or bearish, one concept is relevant to all options traders: risk management. After all, it's easy to be enticed by the leverage offered with certain options plays. The potential for large gains on relatively small amounts of capital is a double-edged sword, however. The potential for large losses is high as well.

This final chapter explores some of the basics of risk management, such as position sizes and not putting all your eggs in one basket. We also consider order entry techniques and position adjustments. The book concludes with a brief discussion about social media, including what information is worthwhile and what is likely to be fleeting.

Risk Management

Leverage—You have heard the term and have seen examples many times throughout this book. That's because options give you leverage to control relatively ...

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