Volatility—the feature that stockholders are most concerned with—may serve as a big advantage to options traders. Stockholders like steadily rising markets because that makes profits. If you are like so many first-time investors, you probably began your investment program during bull markets; unfortunately, markets are cyclical and those uptrends can and do turn suddenly.
If you are a more experienced investor, you understand that success has to be defined in terms other than the absolute of winning or losing. You know that being right more often than wrong defines investing success. You also know how to diversify and limit risk even in a rising market, and you understand the old wisdom that stocks climb a wall of worry.
Smart Investor Tip
Success in the market may be defined as being right more often than being wrong. Expecting loss is realistic; if a loss takes you by surprise, then you need to take a second look at your expectations.
Hindsight always clarifies observations of upward and downward trends. When we look back, the signals appear obvious, as though they could have been anticipated easily. However, it is far more difficult to identify the type of market we are experiencing at this moment, and what is going to happen next. At any given time, some observers think the market is rising, others think it is falling, and a third group adopts a wait-and-see approach. Each of these groups can cite plenty of market data to support their points of view, but they cannot all be right. Your dilemma in this environment of uncertainty is finding a way to build your portfolio of stocks while also minimizing your risk of catastrophic losses. You want to take advantage of emerging rises in the price of stocks and, at the same time, limit your risk exposure. You may be tempted to flee the market in times of uncertainty, understandably. But fleeing is not the only prudent decision. You can also employ options in volatile markets to take advantage of that volatility, and to improve profits while protecting yourself against unexpected losses.
Copyright 2010 by Michael C. Thomsett. All rights reserved. John Wiley & Sons, Inc."
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