Options

All posts tagged Options

Options increase leverage

Posted by BMoreTrader on May 4, 2016
Posted in: Trading Beliefs. Tagged: , , . Leave a Comment

Belief:

Options increase leverage.

What this means to me:

Options are a trading tool that allow me to put fewer dollars on the table to make a trade.

What this belief gets me into:

This enable me to hold more positions that trading stocks alone.
I need to understand options and their pricing.
I have to make sure the option is liquid enough to trade.
I have to subscribe to more market data.
It is easier to put on large positions.
I could have positions that are too large.
Options activate my excitement part.
Satisfying or keeping my excitement part in check.
Examining why I need leverage.

What this belief gets me out of:

Having to only trade stocks.
It reduces the limitations of my capital.

Limitations of this belief:

This belief seems to be more of a fact.

Utility of this belief:

This is certainly more useful than options are dangerous or options are risky. There does not seem to be any emotional charge with this belief.

Conclusions:

The real issues to examine here are why use options and why use leverage? What do those items represent for me? Options are a leveraged trading instrument. How I use options and leverage are the real issues to be examined.

Options can be used to limit risk.

Posted by BMoreTrader on April 27, 2016
Posted in: Trading Beliefs. Tagged: , , . Leave a Comment

Belief:

Options can be used to limit risk.

What this means to me:

Options are a tool and can be used to change or create different risks for trades.

What this belief gets me into:

Studying options.
Learning about option markets and pricing of options.
Learning about the different price characteristics of options.
Looking for ways to limit my risk.
Looking for complex solutions to simple problems.
Determining (some of) my risks when I put on a trade.

What this belief gets me out of:

Accepting all the risk for a trade.
Complexity can create knowledge or vision gaps, so using options may keep me from understanding the larger vision of a trade and how it might turn out.
Taking full responsibility for a trade (The option has me covered.)
Options are not available for all markets, so this could keep me out of markets without them.

Limitations of this belief:

Not all risks are covered by options. Options introduce another level of complexity to the market and trading systems.

Utility of this belief:

Knowing about options can create new trading systems, positions sizing strategies, and offer protection from gaps.

Conclusions:

Options are a two-edged sword: they offer advantages and solutions to certain trading issues while also introducing complexity and greater knowledge requirements. The complexity creates more opportunities for mistakes but also may create more trade opportunities. Limiting risk is a useful application of options, however the realm of options raises many more issues to explore and clarify.