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Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition by Sheldon Natenberg

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 13

Risk Considerations

When choosing a strategy, a trader must always try to find a reasonable balance between two opposing considerations—reward and risk. Ideally, a trader would like the greatest possible profit at the smallest possible risk. In the real world, however, high profit usually goes hand in hand with high risk, while low risk goes hand in hand with low profit. How should a trader balance these two considerations? Certainly, a strategy should have an expected profit that makes it worth executing. At the same time, the risk associated with the strategy must be kept within reasonable bounds. And whatever the risk, it should never be greater than what is commensurate with the potential reward.

In option trading, the reward is typically ...

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