What's Your Plan B?
• AS A TRADER, you already know that to make money in the markets you have to take a risk. What you may not know is that your risk management doesn’t have to be relegated to only stop losses or vertical spreads.
Maybe you got lucky and the markets did well, as did your overall P&L. Plan A is working out beautifully. But what if the market or your stocks tank? It’s a simple question to answer in theory, but tough to solve when your screens are red and your positions are bleeding
with every tick down. That gap between how you think and how you act isn’t necessarily
your fault, or something many of us can solve. It might just come down to how you set things up going into a trade.
Fortunately, there are a few strategies you can use to hedge your stock positions at
the onset of a trade. Depending on the volatility backdrop and how much
of a hedge you’re looking for, there are options you can wrap around your stocks that
can not only reduce your risk but could even set you up to manage your trades
smarter. But they can also impact your upside potential. We break it all down in “When a Hedge Is Not Just a Hedge” on page 16.
When it comes to managing trades more successfully, there are a couple
What’s Your Plan B? other key components of options trading to help you see where you’re going. For example, options greeks describe the variables that can impact how an option’s price may respond to market conditions.
One such greek is theta. Option contracts have a limited lifespan, and that means as time passes, the option’s value decays. “Theta: Time Waits for No Trader” on page 24 kicks off a multi-part series on options greeks by diving into theta: what it is, how it works, and some of its lesser-known nuances.
The markets are dynamic and always changing, and you’ll never stop learning from them. So it’s always good to add a few key strategies and concepts to your trader toolbox that can help you make smarter decisions in any market.