Comments on: Consider Risk First, Then Reward

By: World Series Series, Part 2 - Have a Backup | TheStockBandit.net

World Series Series, Part 2 - Have a Backup | TheStockBandit.net — Fri, 24 Oct 2008 01:46:57 +0000

[...] Determining a ‘what if’ scenario at any given time in your trading is a good practice to be in. It’s also a great reminder to size your trades accordingly, because you don’t want everything riding on any one trade - ever. The idea of doing that might be exciting if you were to be right, but that’s a 2-way street and you absolutely must limit your downside if you’re going to stay in this game and survive. [...]

By: TheStockBandit

TheStockBandit — Tue, 11 Dec 2007 01:15:41 +0000

Hey Handy,

Thanks for your comment. Yes, options are leveraged so they move more on a percentage basis than their underlying stocks. However, I think the trading strategy should be determined by the moves in the underlying stock. So the stops may be wider for the options, but I think the exit criteria should be based on the stock having broken support or whatever technical criteria you specify.

An example would be XYZ with a $25 buy point and a $24 stop. If you don’t want to buy the shares, buy call options instead. Exit the call options when XYZ breaks $24 to the downside. That might mean a larger percentage loss on the calls vs. the shares, but the upside is also much larger for the trades which do work.

Hope this helps!

Jeff

By: Handy

Handy — Sat, 08 Dec 2007 07:40:34 +0000

Dear Jeff,

In order to set the risk vs reward in stock option, what is the stop loss setting in options which we understand the the movement of this options is wider compare with stock.

Especially if the stock has very high volatility such as GOOG or CROX.

Thanks for sharing