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Invisible Risks Of Options

No matter how expertly you are able to time entry and exit in option positions, you face one specific risk not often raised or discussed: the risk of doing too much, too soon, and for the wrong reasons.

This "greed and panic" factor is not unique to options trading. Everyone who has every bought stock and lost a big chunk of capital knows all about it. The price moves rapidly up so you buy more, and then it all evaporates when the price reverses. Or the price moves down and you panic and get out just before prices rebound. It's the old "buy high and sell low" strategy, when we all should be buying low and selling high.

With options, the tendency is the same even while the product is different. Some traders forget that today's price of anything is just the latest in an unending series of price swings. It is not a starting point, and in spite of the best of intentions, price does not move in the direction we want only because a trade has been opened.

Set goals for yourself, so you know when to exit. Your goal should set a profit target, but also a loss bail-out point. You're better off booking a small loss than a total loss a few weeks later. This is not as easy to follow through, but it's important to increase overall profits. Succeeding with setting goals and following them is tough, but worth the effort.

The real key to effective use of options is to use them to manage risk, not to replace one risk with another one - especially when the new risk is based on greed and panic rather than on trend watching. Remembers, bulls and bears can both succeed in the markets, but pigs and chickens get slaughtered. So if you are most interested in low-risk trading, a quick and easy solution is to know your markets.

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