the option trader handbook - strategies and trade adjustments

[...]... understanding of how options work and a familiarity with the basic strategies Nonetheless, we provide a quick overview of the most important characteristics of options and various strategies to remind the reader of the terms and strategies that are used throughout the book The trade adjustments discussed range from basic to quite complex Therefore, a general background in option strategies is required and. .. one trader ignored maximum risk and good principles of risk management and brought down an entire bank TRUTH ABOUT REWARD Before proceeding further with risk and trade management, we clarify some myths related to the rewards of option trading Breaking down some of the misconceptions of the potential rewards of trading options 6 THE OPTION TRADER HANDBOOK is imperative for traders to truly understand and. .. the relevant background to a specific strategy was presented earlier in the handbook We tried whenever possible to make it easy for the handbook users to read up on the specific strategy they are interested in and find all the information they need in one place However, you will find that all Preface xiii the strategies and adjustments complement each other and you will gain a better understanding of the. .. trading strategies are risk and trade management Learning 1 2 THE OPTION TRADER HANDBOOK how to control and manage the risk of each and every trade, as well as your portfolio on the whole, is vital to protecting your capital Many investors have had the experience of making money on a series of trades only to see one or two bad trades wipe out all their hard-fought gains Imagine working hard the first... presents the art of trade adjustments in a logical sequential order First, we discuss the most important aspect of investing—risk and trade management Trade adjustments are tools used to implement trade and risk management Therefore, you cannot understand how to use the tools if you are not aware of the theory behind them That is why in the first chapter we present the guiding principles of risk and trade. .. point of any trade before you enter the position as well as the new breakeven point created from any adjustments to the trade 12 THE OPTION TRADER HANDBOOK TRADE MANAGEMENT Trading Theme In the previous section we covered risk management and recommended that before every trade you should determine your maximum risk, maximum reward, and breakeven points and also determine an exit strategy if the position... to option trading and trade management? Like chess novices, many new traders focus only on the mechanics of trading They study the option strategies and concentrate on how to open and close positions, that is, they become mechanical traders However, every trade has a theme behind it When you select a stock to invest in, there is an overriding theme to your investment You have conducted research and. .. you should always determine and quantify the risk and reward of the investment 4 THE OPTION TRADER HANDBOOK With respect to options, the quantification of risk and reward is very straightforward and is covered in our first and most basic principle of risk management: KEY PRINCIPLE You must be able to determine and quantify the maximum risk (loss) and maximum reward, as well as the breakeven points, of... frustrated, and even freeze up and fail to pull the trigger and close the trade when you should You may even utter the phrase that is the kiss of death in risk management: The stock has to recover and move back higher, it cannot just 8 THE OPTION TRADER HANDBOOK keep falling forever!” The reason we call this the kiss of death is because as soon as you utter this phrase you are practically giving in to the. .. between chess players and chess experts in this respect is that experts understand the theme and the strengths and weaknesses of the opening they select as well as the strengths and weaknesses of their playing style and focus all their moves on executing that strategy Assume you have analyzed and researched the stock of XYZ and have decided that the stock will move higher over the next few months Your . trading strategies are risk and trade management. Learning CHAPTER 1 Trade and Risk Management 1029G_c01_0 1-2 8.qxd 02/29/04 00:49 Page 1 2 THE OPTION TRADER HANDBOOK how to control and manage the. www.WileyFinance.com. 1029G_fm_i-xiv.qxd 3/11/04 17:23 Page ii The Option Trader Handbook Strategies and Trade Adjustments GEORGE M. JABBOUR, PhD PHILIP H. BUDWICK, MsF John Wiley & Sons, Inc. 1029G_fm_i-xiv.qxd. electronic books. Library of Congress Cataloging-in-Publication Data: Jabbour, George (George Moussa) The option trader handbook : strategies and trade adjustments / George Jabbour, Philip Budwick. P.