Risk Management with Options

Options for money management make a lot of sense but require significant study, experience, and discipline for the strategy to work properly. There are three basic strategies for money management with options but dozens of permutations on them. Remember, no matter how sophisticated your strategy is, you still must be correct about the price movement of an option to make a profit. There is no magic in the torturing of the numbers, friend.

These four strategies are based on long the EUR/USD.

[caption id="attachment_13313" align="aligncenter" width="550"]An Options Strategy for the Spot Trader An Options Strategy for the Spot Trader[/caption]

Options are relatively expensive. You might think a good strategy would be buying both a short-term call and a put before a big news announcement. If prices move dramatically, the profit on one will more than compensate for the loss on the other. Others have also considered the idea. Option prices spike before such events, making a profit unlikely, except for a quite extraordinary price move. There is no free lunch; sophisticated traders and researchers have almost certainly already studied or tried any strategy you may discover. Said another way -- the markets are efficient.

Because of the complex matrix of possibilities, options have probably come under more mathematical scrutiny than any other investment vehicle.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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