Hello All,
I am a seasoned trader and never really got into options in the past. I am actively learning from a variety of resources but want to really understand risk management in relation to options.
One formula that I stumbled on was:
Account Size x % Risk = $ Risk / Option Price x 100 = Max # Contracts
However, as I continue to learn I found that the premium will change over the life of the contract and the quoted Option Price is not set in stone. I would assume the Greeks contribute to this. I want to know exactly how much I would lose before entering a trade – although, this might not be possible.
I was wondering if someone could kindly share a formula or a resource where I can deep dive risk management more.
I plan on trading the S&P 500 once a month with a 3-4 week hold period. As my broker has different apps and accounts for a regular margin account where I can trade Stocks and EFTs vs CFDs and FX I might be trading options on an S&P 500 EFT since it takes multiple days to transfer funds between accounts and I will hold CASH or PSA EFTs while waiting for a trade. Not sure if this is advisable – perhaps a broker change will be in order.
Thank you and I appreciate any help!
Posted by Ma774x
2 Comments
WHAAT? I got excited for nothing. You never used an option. You don’t know what the greeks are. Why are you asking for risk management.
You have taken no risk in options.
Unfortunately there isn’t a set “risk management” for trading options, or any product really. It’s entirely dependent on the scenario, strategy, and so on.
So to figure out what makes sense for you, id start by simply identifying the potential risk (as a $ amount) for the individual position, then assessing how you feel about that metric with respect to the entire portfolio. Then, I’d assess the expected return of the individual trade opportunity.
Here’s a video on how I think about sizing trades (which is the primary aspect of risk management in trading) How I Size Options Trades
https://youtu.be/mRy0jU6HJ_8