Risk Management Revisited

I just came across a post (hat tip: strait73) by Jared at CondorOptions that describes the risks associated with trading options so well, that I must share it immediately.

This reaffirms my message, but it makes it even more easy to understand.

  • Risk management is the key to success
  • Proper sizing is a major part of risk management
  • It's not the spread type that determines your success
  • A good risk manager utilizes several spread types


2 Responses to Risk Management Revisited

  1. Gil 04/24/2009 at 9:48 PM #

    Just to add another IC perspective, based upon my personal skill:
    If a trader has got ICs on multiple indexes simultaneously, for instance RUT and XEO – and the market becomes extremely volatile – most likely he risks both. That’s why such IC trader might take into account that even with proper sizing he can still ‘be on the spot’ in all those ICs.

  2. Mark Wolfinger 04/25/2009 at 12:05 PM #

    Proper sizing refers to an entire portfolio, not to a single position.
    And ‘being on the spot’ with more than one position at the same time is a problem.
    Although it nice to be diversified when trading, the more different underlyings you trade simultaneously, the more danger you have of incurring a simultaneous problem. When important decisions must be made in several positions, it’s difficult to devote the necessary time to each. That’s my reason for trading only a single index.
    It’s a diversification vs. ‘ability to handle a problem’ trade-off.