Chapter 4

Option Risks and Rewards

In This Chapter

arrow Recognizing your true stock and option risk

arrow Maximizing stock and option rewards

arrow Visualizing stock and option risk and reward

arrow Introducing combination positions

Risk is a part of life, and options and stock trading have more than their share of it. Traditionally, successful, professional, and experienced traders at any level decide when they are going to exit a position before they open the trade. And though that is an excellent idea, how the strategy is carried out is even more important. That’s because even though you may enter an advanced order, or you may choose to execute the exit manually, stocks may gap down (that is, open for trading significantly below the previous day’s closing price) below your pre-decided exit level and lead you to greater losses than you planned for. If you are planning a manual exit, the hit to your position may be even greater.

The bottom line is that the maximum risk from a stock trade is your entire initial investment. If you use margin, you can lose more than what you started with. That ...

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