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Which Asset Class Provides Maximum Profits and Minimum Risk in Trading

Minimum Risk in Trading

Listed Stock options offer the greatest profit potential of any investment vehicle. Profits of 100 percent or more. Risk, on the other hand, is limited to your original cash outlay. Therefore, to attain maximum profits trading listed Stocks options, aggressive investors should never target for a profit of less than 100 percent for most options trades. This will ensure that your target risk/reward ratio is always in your favor. The losing strategy followed by most option traders is to accept small profit objectives, while risking 100 percent of their investment. To win at options trading, your gains must exceed the inevitable losses that will occur.

Before we talk about the mechanics, it’s vital that we introduce a factor that many believe is the most important – and most ignored – consideration to investment success…proper money management.

Have an intelligent money management system that preserves capital

The first step toward intelligent money management is to trade only with that portion of your capital that can comfortably be devoted to speculation. This will permit you to act rationally and to sleep soundly, neither of which is possible when your nest egg is at risk.

Once you have determined your trading capital, there is one final important rule. Never risk your entire trading capital on a single trade. This rule holds regardless of how successful you have previously been and regardless of how attractive the next trade appears. There will always be losing trades. By compounding your capital after a few profitable trades, you are exposing yourself to some potentially very painful capital losses once that loser comes along.

Always keep a large portion of your trading capital in reserve. By doing this, you will then have the staying power to ride out the losers so you can ultimately profit from the winners (including those winners that show “paper losses” early, but are eventually closed out for gains). There will always be a number of open trades that take away from the capital available to purchase new positions.

Logic versus emotion

Why do many option traders embrace a losing strategy? Usually, for reasons related to human emotion rather than tologic. After all, people trade options in the hope of achieving substantial profits. But “human nature” often interferes, usually in the form of two major culprits:

Fear – Purchasing an option involves the risk of a total loss of one’s investment. However, in exchange for the assumption of this risk, the investor has the opportunity to realize profits of many times the initial investment. Many investors “bail out” of a position when they have a small loss for fear of sustaining a total loss. Unfortunately, they are robbing themselves of the potential for huge gains and negating their reason for buying options in the first place!

Greed – The other side of the emotional coin is greed. The options investor will accept the possibility of a total loss as the price for achieving large gains. So far, so good. So where does the greedy investor go wrong? The answer is both simple and financially tragic. No profit level is enough for this individual. If he doubles his money, he wants a triple. If he achieves a triple, why not aim even higher? This process never ends. The result? Some very healthy “paper profits” become tiny realized gains when the direction of the underlying stock reverses. In fact, many paper gains actually become realized losses!

 

It is clear that the fearful investor sharply limits his profit opportunities, and the greedy investor lets his profits slip away. What are the cures for these very human, very common, yet very financially costly afflictions? Let’s deal with them individually.

Fear – how to eliminate its negative impact

Many investors are attracted to options trading by the unique opportunity to achieve profits of many times their original investment. This is particularly true for the aggressive options traders with years of exp. On Options Trading. Unfortunately, a basic tenet of options trading is often ignored or forgotten: To be in a position to realize the profit rewards of the options market, you must be financially and emotionally capable of withstanding the ups and downs of the options marketplace. Even the most profitable trades often show “paper losses” at some point. Very few options go straight up, simply because very few stocks go straight up or straight down. If a trader panics out of a position with every downward blip in price, he will ultimately be a loser in options trading. So how does an investor cope with fear?

Use only your trading capital for options trading – Never buy puts or calls with money needed to pay bills or meet potential emergencies. Intelligent trading decisions are rarely made when “scared money” is involved. You should restrict your option commitments to funds that can be lost without undue financial hardship.

In determining your trading capital for an options program, it may be helpful to use the Rupees invested in a common stock portfolio as a frame of reference. For illustrative purposes, if 50 lac were to be invested in common stocks, we would generally consider an investment of up to 10 lac in the Option portfolios as an equivalent risk (with the remainder invested in risk less or nearly risk less instruments such as Bonds or FD or money market funds).

I rarely recommend that you must invest 100-percent of your capital in Trading options. We suggest maintaining a cash reserve that can be devoted to new opportunities as they develop, as well as provide a cushion of protection. ForOption trades, we usually suggest that no more than 30 percent of your options trading capital be devoted to the trades in either portfolio. Thus, your minimum account size should be large enough to allocate sufficient capital to the trades in one or both portfolios and to maintain an adequate cash reserve.

As a rule, your entire trading capital should never be at risk at any one time in the options market, regardless of how attractive the current situation appears.

Remember, there will always be losing trades in the options game. Therefore, with rare exceptions, it’s best to keep a portion of your trading capital in reserve.

Know your risk threshold and don’t exceed it – Clearly the options trader has a higher risk threshold than the unleveraged common stock trader. The options trader is willing to accept the possibility of a large loss in exchange for the possibility of gains far in excess of their maximum possible loss. However, the process does not end there. Each options trader must identify their own risk threshold.

Some traders will be attracted to straight option purchases By calculation  & they are  called Aggressive Optionportfolio players, a strategy that possesses the largest profit potential as well as the highest probability of a large loss if the underlying stock moves dramatically against expectations.

On the other hand, the Put Selling portfolio is ideal for investors looking to generate income in their portfolio with the possibility of acquiring a quality bluechip stock at prices below current levels. Put Selling involves selling an out-of the- money put on a quality stock that the investor would be willing to buy if the stock took a temporary plunge. However, in most cases, the put sold will expire worthless, allowing the investor to pocket the premium without ever having to buy the stock. While there is a margin requirement when selling these options, this commitment of funds is significantly less than the outright purchase of the equivalent number of shares. Plus, we’ve added straddles and strangles to this portfolio to benefit from large stock swings regardless of the ultimate direction.

An options trader who exceeds his risk threshold will react emotionally and, usually, incorrectly. We in this articleprovide you with a broad spectrum of aggressive and conservative trading approaches, so you can always trade in accordance with your risk threshold.

Diversifying options positions – A major advantage of trading in options is “truncated risk,” whereby your loss is limited to your initial investment, yet your profit is theoretically unlimited. Diversification will allow you to use truncated risk to its maximum advantage. Diversify your option positions using our techniques principle of two-dimensional diversification. The key to achieving profits in options trading is to maximize your chances for very large percentage gains. This requires the financial and emotional staying power provided by our first two trading rules, to assure that you will be around to achieve these huge profits. The next step involves the risk-reducing and profit-maximizing technique of diversification. By always carrying several different option positions, you will maximize your chances to achieve one or more huge winners and minimize your chances of incurring large losses.

We strongly believe that such diversification should be in two dimensions.

First, option positions should be established in several underlying stocks in unrelated industries.

Second, invest in puts as well as in calls. This strategy will put you in a position to profit regardless of overall market conditions, so that guessing wrong on the overall market does not severely deplete your trading capital. However, the ratio of calls to puts will vary according to our overall market view. Many people believe that the only way to make money in the market is to take a bullish position on an advancing stock. You can just as easily take a bearish position by buying a put, while still enjoying the advantage of the “limited risk” offered by options.

Stay the course – It is important for the savvy options investor to realize that it is unwise to exit a trade as soon as a position moves against them. Many options traders will purchase an option at 6 and then, out of fear, sell it the same day should it decline to 5.

Assuming that (1) you have not changed your market outlook, (2) you are using only your trading capital, (3) you are purchasing options within your risk threshold, and (4) you are sufficiently diversified in calls and puts, there is never a need to panic and sell.

An option is purchased for its huge profit potential, which can only be fully realized by allowing positions to remain open for a reasonable period of time.

Overcome greed with target entry and exit points

The trading rules outlined here will maximize your chances of having several very profitable option positions at any given point in time. The important question that any investor must ask, because it will ultimately determine their bottom-line profitability, is “When do I sell?”

Determine your target exit point and your closeout date before you trade – A target exit point is merely the option price that would result in a substantial, yet attainable profit. The closeout date determines exactly when the position is to be closed out if your target exit point is not achieved. By closing out aggressive positions prior to option expiration, you avoid the severe deterioration in premium that occurs in the final weeks of trading, thus conserving capital.

In our article it contains recommendations for two distinct portfolios:

Aggressive and Put Selling. These recommendations include specific closeout dates and target profits that are tailored to each situation and expressed as percentages of your purchase price. The target exit points for the Aggressive portfolio are set at target profits of at least 100 percent. The Put Selling portfolio targets profits of around 10 to 25 percent (straddles/strangles will usually target profits of 50 percent and higher).

Using your purchase price and the target profit, you can determine your target exit point.

Set your profit objectives in advance and determine your target exit point before you trade or at the time you make your option purchase. By doing so, you avoid the consequences of one of the major stumbling blocks to achieving trading profits – greed.

It is virtually impossible for most investors to set reasonable profit goals once a stock has advanced substantially in price. That “extra point” or “extra half-point” becomes a moving target with each advance in the stock’s price.

It is not surprising that often the target is not achieved, and the investor is forced to panic out because of tumbling prices.

It is not advisable to deviate from your target exit point once you have established your position unless there is some specific fundamental change in that sector / Company / policy or country situation. The target exit point is determined before you trade, and it is based upon logic. Once you have entered the heat of the battle, the tendency will be to base your decisions ( Fundamental or Technical ) Not upon emotion and, if its based on emotions then your decisions will be incorrect. Resist the temptation to sell at a loss prior to the option achieving its target price. You will be yielding to fear, robbing yourself of some potential gains. Also, resist the temptation to raise your profit objective as the price of the stock nears your target exit point. You will be yielding to greed, and your profits will slip away.

You should not take profits haphazardly – Taking profits haphazardly encompasses a multitude of sins. It includes having no specific profit objective (the greed syndrome) as well as setting illogical and insufficient profit objectives (a 10-percent gain) or emotional profit objectives (“This will be my lucky week”).

Use a maximum (minimum) entry price –One of the most important pieces of information is the maximum (or minimum) entry price. This indicates the maximum (minimum) premium you should pay (accept) to get into a trade, regardless of how the underlying stock is moving at the time. Sometimes trades run away from us above (below) the maximum (minimum) entry price. It’s very important to exercise discipline and not chase trades, as you’ll overpay (accept less) in too many situations relative to the few trades you might miss.

Not having Good knowledge of Greeks , IV & various other Options premium calculation methods…If you don’t have idea please do not do options trading at least.

Because the entry price is based on our calculation based on Greek / IV / Other models  which gives us probability that the trade will be successful, paying too much for an option, even when we are targeting for a 100-percent return, will decrease our potential reward while the risk remains unchanged. For instance, a trade with a profit potential of 100 percent and a maximum entry price of 5 Rs/- would have a target exit price of 10 Rs/-. If we instead entered at 6 Rs/-, the potential profit drops to 67 percent because our target exit price does not change. This upsets the risk/reward balance for the trade and will likely result in a decreased overall profit over the long run.

You can be successful with a winning percentage of under 50 percent

The principles of money management in options trading cannot be mastered without a firm grasp of the statistical probabilities involved.

“Why It’s So Difficult for Most People to Make Money in the Market,”

“Most of us grew up exposed to an educational system that brainwashes us with the idea that you have to get 94-95% correct to be excellent. And if you can’t get at least 70% correct you’re a failure. Mistakes are severely punished in the school system by ridicule and poor grades, yet it is only through mistakes that human beings learn.

Contrast that with the real world in which a cricketers in India in his sport life of 5 Years then gets paid millions. In fact, in the everyday world few people are close to perfect and most of us who do well are probably right less than half the time. Indeed, people have made millions on trading systems with reliabilities around 40% but they stick to their stop loss or exit system.

It should be noted that various experts traders not specifically referring to options trading in his discussion of winning percentages. In fact, you should expect winning percentages for option premium buying to be lower than that for trading stocks or futures. Our research shows that successful short-term options traders are correct on roughly 50 to 60 percent of their trades. Although this win rate may seem rather low, there are factors such as fighting time decay and preserving capital by shutting down losing trades beyond a certain point (some of which may ultimately have been winners) that are particularly relevant to options trading. The important point is that positive overall returns over the longer haul result from allowing your profitable trades to run and cutting your losses in other trades relatively quickly.

The concept of limiting losses and letting the winners run cannot be overstated.

“Accepting losses is the most important single investment device to insure safety of capital. It is also the action that most people know the least about and that they are least liable to execute … The most important single thing I learned is that accepting losses promptly is the first key to success.”

 “The difference between the investor who year in and year out procures for himself a final net profit and the one who is usually in the red is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.”

Losing is part of the game

An offshoot of this lower winning percentage, and something that often comes as a surprise to many traders, is the experience of coping with an extended losing streak. The ultimate goal of achieving profitability will remain out of reach unless great care is taken to control the amount of capital allocated to each position, as even wildly successful traders are not immune to a string of losing positions. In short, the objective in options trading is to “stay in the game” through proper money management techniques that allow you to weather the inevitable storms of losing trades.

To shed some mathematical light on the importance of proper money management, our

Quantitative Analysis group created the following table .

That’s the Track record we experience when we work on Stock options trading & set our goal to achieve certain percentage of Return on Funds.

It also depends upon the Fund size. We deploy 20 Cr of Fund.

Percentage Of leverage used 2X  On wards 3 4 5 6 7 8 9 10 20

Table of Leverage & Return.

5% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

10% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

15% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 99.9%

20% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 99.8% 99.1% 97.2%

25% 100.0% 100.0% 100.0% 100.0% 100.0% 99.8% 98.9% 96.2% 90.7% 82.2%

30% 100.0% 100.0% 100.0% 100.0% 99.6% 97.7% 92.2% 82.3% 69.1% 55.0%

35% 100.0% 100.0% 100.0% 99.7% 97.1% 89.0% 75.2% 58.5% 42.6% 29.6%

40% 100.0% 100.0% 99.9% 97.6% 88.4% 71.3% 51.7% 34.6% 22.0% 13.5%

45% 100.0% 100.0% 98.9% 90.7% 71.7% 49.1% 30.3% 17.6% 9.9% 5.4%

50% 100.0% 99.8% 95.2% 76.8% 50.8% 29.2% 15.5% 7.9% 3.9% 1.9%

55% 100.0% 99.0% 86.0% 57.5% 31.3% 15.2% 7.0% 3.1% 1.4% 0.6%

60% 100.0% 95.8% 70.4% 37.7% 16.9% 7.0% 2.8% 1.1% 0.4% 0.2%

65% 99.8% 87.8% 50.9% 21.5% 7.9% 2.8% 1.0% 0.3% 0.1% 0.0%

70% 99.0% 73.1% 31.8% 10.6% 3.2% 1.0% 0.3% 0.1% 0.0% 0.0%

75% 95.8% 53.0% 16.8% 4.4% 1.1% 0.3% 0.1% 0.0% 0.0% 0.0%

80% 86.5% 32.0% 7.2% 1.5% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0%

85% 67.2% 15.0% 2.4% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0%

90% 38.9% 4.7% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

95% 11.5% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

To under stand the above Table.. Let’s take example

If we leverage 2X of our Margin & set our goal to achieve 5% in Year then yes we get the result. But when we set Goal to achieve 95% return in Year with leverage of 2X then there is 11.5% chance to get that result.

The figures in this table are based on a 5000-trade period, or roughly what you would receive over a 1- Years period with the Aggressive portfolio.

The take-home message is that you must be prepared to ride out the ups and downs of an options trading program in order to reap the ultimate reward in profits. What we saw in last 6 Years while doing Stock Options Trading, a system with an expected winning percentage of 45 percent has a 71.7-percent probability of seeing at least six consecutive losing trades over a 50-trade period; with a 50-percent winning percentage, this probability is about 50 percent. Given that the Aggressive portfolio has experienced a 45-percent winning percentage, the chances of six or more consecutive losing trades out of 50 are on the order of about 70 percent.

So not only is it crucial that you implement sound money management practices, it is also crucial that you understand and accept that there will be losing streaks (as well as winning streaks) along the way. A losing streak does not signify that our approach is defective, and a winning streak does not signify that our approach is the road to instant riches. These streaks are simply part and parcel of what to expect along the way to achieving a bottom line profit from the “positive expectancy”.

Given the high probability (and in some cases, certainty) of losing streaks within a given period, it is critical to realize that investors who place too much capital into successive  run the risk of decimating their trading account during a perfectly normal trading cycle. In other words, they will be unable to stay in the game. Those that are able to stay in the game and reap the rewards of the hot streaks and higher returns of winning trades stand a better chance of ultimate profitability over the longer haul.

The moral of the story is that even though low winning percentages and long losing streaks are part of the options buying game, profitability is achievable if you let winners run and cut losses short (that’s our job), while staying in the game by using proper money management principles (that’s your job).

Allocation is critical

In the same spirit of “staying in the game,” we now turn our attention to allocations per trade.

We will not attempt to tell you a minimum Rupees amount to trade. This is a decision best left to each individual investor that takes into account their overall profit goals and costs of trading (e.g., commissions). Rather, our goal is to discuss the percentage allocation to each trade.

Every trade should represent a set percentage of your total account.

For example, let’s say you have $25,000 available for options trading and you wish to allocate 10 percent of your total account to each trade. You would therefore trade $2,500 for your first trade. Assume the trade gains 80 percent, or a $2,000 profit. Because your account size is now $27,000, your next trade would be for $2,700 (0.1*27,000). Now let’s say your first trade lost 40 percent (remember you need to let your winners run and cut your more numerous losses short), or $1,000. Your account would now stand at $24,000, meaning that you would allocate only $2,400 to your next trade. Notice how this differs from a fixed-dollar strategy in which you would invest $2,500 in each trade.

We should note that with options trading, it is difficult, if not impossible to trade exactly 10 percent (or whatever percentage you choose) on each trade. It is rarely the case that an option’s premium will divide evenly into your dollar allocation for any trade (e.g., five $5 contracts, or $2,500). The best solution is to trade as close to your allocated percentage without going over.

That is, if your allocated amount for a particular trade is $2,500 and you’re interested in a $7 option ($700 per contract), you should trade only three contracts ($2,100).

Also, do not let your allocation dictate what option you will play. For example, say you have $2,500 for a trade and your trading system calls for higher-premium in-the-money options. If you have your eye on one priced at 7 (three contracts, or $2,100), don’t opt for a cheaper out-of-the money option priced at 3 (eight contracts, or $2400) just so the total trade is closer to your allocated amount. In other words, don’t compromise your trading system for the sake of getting nearer to your allocation.

The power of convexity

One of the primary advantages of the fixed fractional bet system is the principle of  convexity – playing more dollars on the way up, while fewer dollars are at risk after each losing trade. On the downside, this system keeps you in the game longer by allowing you to weather the losing streaks that will inevitably occur.

For example, if you start with $25,000 and play the same $2,500 per trade, you will lose half your bankroll ($12,500) if you start off with 10 consecutive losses of 50 percent per trade. While it is unlikely that you will have such a streak right off the bat, it is not beyond the realm of possibility.

However, the fixed fractional system has quite a different outcome. In fact, this methodology comes out $2,468, or nearly 20 percent, ahead of the fixed investment approach, as shown below:

Trade No. Portfolio Amount Allocation (10% of portfolio) Amount Lost (-50%)

New Portfolio Balance

1 25,000 2,500 (1,250) 23,750

2 23,750 2,375 (1,188) 22,563

3 22,563 2,256 (1,128) 21,434

4 21,434 2,143 (1,072) 20,363

5 20,363 2,036 (1,018) 19,345

6 19,345 1,934 (967) 18,377

7 18,377 1,838 (919) 17,458

8 17,458 1,746 (873) 16,586

9 16,586 1,659 (829) 15,756

10 15,756 1,576 (788) 14,968

On the plus side, let’s assume you enjoy five straight winning trades of 100 percent apiece. Investing $2,500 per trade will result in a portfolio of $37,500 (25,000 + 12,500). On the other hand, the fixed fractional bet system results in a portfolio value of $40,263, or 7.3-percent better, as shown below:

Trade No. Portfolio Amount Allocation (10% of portfolio) Amount Gained (100%)

New Portfolio Balance

1 25,000 2,500 2,500 27,500

2 27,500 2,750 2,750 30,250

3 30,250 3,025 3,025 33,275

4 33,275 3,328 3,328 36,603

5 36,603 3,660 3,660 40,263

In the real world, of course, you will encounter interspersed winners and losers, although the losers will most likely be more frequent. As we have stated repeatedly, the goal of options trading is to keep afloat long enough to take advantage of the bigger winning trades and the winning streaks that will also occur. And proper money management is the best way to play longer. As Smith states, “…risk management rules are really ways of dealing with the psychology of trading…[which] is the most important aspect of trading…discipline is the key psychological trait that the trader needs to make money. Risk management rules are an effort at trying to enforce the necessary discipline.”

Consistency is the key

One other thing we should mention. Don’t vary the percentage you allocate trade by trade.

Don’t double up on a trade after a loss hoping to win your money back right away. There’s a technique some blackjack players use in which they double their bet after each loss, the idea being that eventually the cards will turn in their favor and they will be ahead. That’s fine (we suppose) if you’re betting $10 chips since you likely will have a sufficient bankroll to stay in the game long enough for that to happen.

But options trading is not so forgiving. The wins are not as frequent, the market may be turbulent and volatile, your system may be flawed, and you might run into a series of trades that will wipe you out. Sure, you may get out of the hole with that one winner, but what if doesn’t come in time? If you’re sitting on the sidelines with no cash, there’s positively no way to benefit from those big winning options trades. And as the saying goes, you miss 100 percent of the shots you never take.

One reason we focus on consistency is that options buying by and large involves more losing than wining trades. In exchange for having more losers than winners, you will also achieve bigger average profits on your winners than on your losers. Success is dictated by using proper money management to stay in the game long enough to reap the rewards of the bigger, though less frequent, winning trades. This brings up an issue that we have not addressed – increasing one’s allocation after a series of winners. This is just as dangerous as increasing the percentage after a losing trade. Why is this so?

Remember that there will always be losing trades. Guessing which trade will be profitable and which won’t will have dire consequences if you guess incorrectly. Putting a higher percentage in a loser and less on a winner will ultimately lead to decreased profits. Of course, allocating more to the winners and less to the losers would result in huge profits. But given that you will likely encounter more losing than winning trades, the odds of picking correctly are stacked against you.

The table below illustrates how increasing your allocation can be hazardous to your portfolio’s health. Trader One decided to press his allocation to a third of his portfolio (33 percent) after two big winners, while Trader Two stayed the course. The next three trades produced two 50- percent losers and one 100-percent winner. Despite having a bigger allocation in the winner, Trader One’s performance suffered markedly due to the larger amounts allocated to losing trades.

This difference will become even more pronounced as the overall winning percentage drops below 50 percent.

Portfolio One (Pressing the Bet) Portfolio Two (Consistent) Portfolio Amount

Allocation Gain/Loss Portfolio Amount Allocation Gain/Loss

25,000 10%/2,500 +100%/2,500 25,000 10%/2,500 +100%/2,500

27,500 10%/2,750 +100%/2,750 27,500 10%/2,750 +100%/2,750

30,250 33%/10,083 -50%/(5,042) 30,250 10%/3,025 -50%/(1,513)

25,208 33%/8,403 -50%/(4,201) 28,737 10%/2,874 -50%/(1,437)

21,007 33%/7,002 +100%/7,002 27,300 10%/2,730 +100%/2,730

28,009 (12% portfolio return) 30,030 (20% portfolio return)

Option trading is a statistical game that generally involves a higher percentage of losing trades. Increasing your allocation to recover quicker from a losing streak or to take greater advantage of a winning streak is not in your best interest statistically. Stay with your plan. Be consistent.

Your bottom line will thank you for it.

Keys to successful options trading

By applying all of the techniques enumerated in this article, you will have effectively managed (reduced) your risk andmanaged (increased) your reward (profit potential) so that your target risk/reward ratio is in your favor! Let’s review how this is accomplished.

Managing your risk – You are trading only with your trading capital. You are investing in the portfolio(s) consistent with your risk threshold. Your positions are diversified using principles of two-dimensional diversification, and your capital is protected by your pre-determined closeout dates.

Managing your reward – Because you have managed your risk, you will never bail out too early and thus rob yourself of profit opportunities. You are targeting for substantial, yet achievable, profits (usually at least 100 percent in the Aggressive portfolios) using pre-determined target exit points. With this strategy, you will stand to profit more at your target exit point than you stand to lose. Your target risk/reward ratio is in your favor!

The key to success – Risk/reward management allows you to profit despite the inevitable losses that will occur on specific option trades. In fact, just one large gain could more than wipe out several losses and result in a healthy bottom-line profit! For example, $1,000 invested in an option that achieves a 100-percent target profit (double the original purchase price) will yield a profit of $1,000. If two other $1,000 positions each result in losses of 25 percent, the bottom-line profit would be $500 ($1,000 gain less $500 loss), which is a 17-percent gain on the $3,000 total investment. This could be achieved in a matter of weeks!

Happy Trading

 

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