Risk is the single most frightening aspect of trading any form of securities. In fact, some investors can become so swayed by the fear of losing money that they can become completely paralyzed. This very inactivity can be just as deadly as making the wrong decision, because in the stock market time is money. Bear in mind that when it comes to investing, risk and reward are thought to be the parallel twins of productivity. Where one goes, the other follows. When investment risks are high, there is usually an underlying cause for the associated volatility, creating a similarly high high profit potential. When risks are low, so it seems is profit potential.

There is risk associated with virtually all types of investing, be it stock ownership, or stock option trading. However, you can learn to mitigate those risks, as well as hedging your stock portfolio, by using specific stock option strategies. Once you learn to manage risk in any situation, the process becomes more enjoyable and the potential rewards greater.

To begin with, there are a number of basic differences between investors and traders:
Investors generally tend to passively leave their investments in place for longer periods of time, through both the highs and lows of market fluctuation.

Traders tend to make shorter-term “trades,” taking advantage of market highs while attempting to avoid the lows.

Techniques employed by traders are generally more active and are intended to primarily make money on the trade itself. If a trader’s portfolio is truly balanced, it will contain both short, as well as long-term holdings. Trading options is a method of using small amounts of money to make exceptionally high profits within a short period of time. Conversely, all things being equal, you can lose the same amount of money in the same amount of time.

Many savvy investors combine stock ownership with stock option trading, using options as a hedge against catastrophic drops in share prices. Whether used in combination with stock ownership or on its own, part of the appeal of trading stock options is that it is done with little interest in market fluctuations. With stock options trading, you will no longer need to scour the Internet while keeping one ear tuned to CNBC for any scrap of news that could potentially mean disaster, or opportunity, to your life savings. Using well thought out stock option trading system means that you will be able to enjoy a methodical, low-stress system of risk management trading.

Prudent option traders:

  • Don’t care whether they are in a bull or a bear market.
  • Can achieve positive portfolio performance without owning stock.
  • Don’t lose sleep over market fluctuations.

Of course, owning stock in itself is a high-risk proposition, due to the fact that shareholders only makes money when the stock price rises. Additionally, stock investors risk one hundred percent of their investment. Anyone who purchased shares of WorldCom or Enron can appreciate this fact.

Knowledgeable options traders, on the other hand, can place trades where the only risk is the price of the option, which is a fraction of the stock’s price. More importantly, trades can be structured to produce a profit whether a stock’s price rises, falls or remains the same, depending upon the technique employed.

Getting started in stock option trading doesn’t mean breaking the bank. Many traders open their accounts with relatively small amounts of money, between $2,000.00 and $10,000.00. The Security and Exchange Commission mandates a minimum of $2,000.00 to open an account. However, most brokerage firms have established their own required account minimums.

The SEC also requires traders to have a basic knowledge of the stock market before providing a customer access to trading. If a trader incurs losses beyond his or her financial ability to cover them, the brokerage firm that made the trade is held responsible.

The system must guard against those who would act without obtaining the proper knowledge, expertise, or funds to do so. Do not put yourself into that category. Invest prudently and intelligently. Seek knowledge and guidance before trading stock options.

Begin by thoroughly familiarizing yourself with options trading. Develop a solid system of operating parameters and stick with them. Avoid naked positions, where your risks are high. Keep accurate accounting records. Set realistic goals on every trade. When your goals have been reached, take the profits and move onto your next opportunity. Don’t get greedy.

Most importantly, when trading stock options, look before you leap. Know before going in what the risks are, as well as the potential rewards. Don’t take positions where the resultant downside can wipe out your portfolio, or worse, produce a margin call from your broker. Especially in the beginning, make conservative option trades that can produce consistent earnings without betting the farm. Since the terms of option trades are relatively short and the investments relatively small, you don’t need high risk positions to achieve overall success.

Donald Shapray, investment strategist and former National Options Manager for Charles Schwab & Co., has coached investor audiences on the Stock Market Channel on television and on business talk radio. For more information, and Free Stock Options Trading Audio Book, go to [http://www.ascentoptions.com] for Better Stock Option Trading.

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