| Risk Management | | | | value, the Put Option will be gaining in value to |
| Trading in the Stock Market can be richly rewarding | | | | substantially compensate for the damage to the |
| but it's also froth with a great degree of risk. | | | | stock's price regardless of how far the stock falls. |
| | | | One shortcoming, and it's a small one, is if the stock |
| Trading and investing should not be left to fate. No | | | | increases in price, you lose in the value of the Put |
| matter what your trading strategy is, financial risk | | | | Option, but your lost is restricted to how much you |
| management is an absolute prerequisite in order to | | | | paid for the Put Option. |
| be profitable. | | | | An added drawback is if the equity price moves |
| There are many methods that can be utilized to | | | | nowhere after buying it, the Option loses value as |
| assist in effective Risk Management Policy. Some are | | | | time passes. |
| more successful than others. Some as well cost more | | | | Having a Covered Call on the other hand, if the stock |
| than others. | | | | price goes nowhere after buying it, you still will |
| A few of the more effective ones are Diversification, | | | | generate profits on the Covered Call. Remember you |
| Options and Stop Orders. | | | | sold it and as the price declines that is to your |
| Diversification | | | | advantage. |
| Diversification is a major tool in security risk | | | | The Covered Call also provides some partial |
| management. Restrict the size of one position to not | | | | protection if the stock goes down, but it's protection |
| more than 5% of your portfolio. | | | | is restricted more or less to the price of the Option. |
| Even if you get wiped out totally in that position, the | | | | If the stock pulls back further than that, you are not |
| result in your portfolio is going to be negligible. | | | | protected. |
| Diversification should not only involve how many | | | | Also, if you sell Covered Calls, you cap your upside |
| stocks you have in your portfolio. It ought to involve | | | | profit because as much as you gain in the price of |
| separate sectors and countries as well. | | | | the stock you will be losing with the Option. |
| Diversification should include US and Global stocks as | | | | It is important to be aware of that if you purchase |
| wells as ETFS. | | | | an Option, your gain is so far as the stock price could |
| Another Risk Management Tool Is Options | | | | go. In the case of a Put, it can gain as the stock |
| Options can be utilized for flat out speculation, as a | | | | price pulls back all the way to zero but a Call is |
| trading vehicle or as an investment hedge. | | | | limitless. |
| Whenever you use it as a hedge, you would buy the | | | | Well at least that's the theory, but we know that |
| equity as well as an accompanying Put. | | | | stock prices will not go all the way to the moon and |
| Instead, you can buy the stock and sell a Covered | | | | gravitation shall catch up sooner or later. |
| Call. | | | | Keep in mind, this is not a lesson about Options and |
| Both of those techniques, buying a Put or selling a | | | | whatever mention of them is brief and restricted to |
| Covered Call, have their benefits and disadvantages. | | | | the scope of these discourses. |
| The benefit of buying the Put is if the stock loses | | | | |