Secret 48DEFENSE, DEFENSE, DEFENSE
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Whenever you are writing options, especially naked options,
you must always be considering the worst case scenario. When
you write options, you win quite frequently and, as a result, tend
to relax when you should be in a disaster mode all the time, for
all you need is one bad hit to wipe you out. Always ask yourself,
“What is the worst thing that can happen to the position? Can I
handle it? What can go wrong?”
Here are ten defensive steps that I take to protect my portfolio
from a disastrous hit:
1. Use stop-losses.
2. Enter only high probability trades.
3. Write only short term options.
4. Write only overvalued options.
5. Cover positions when the option loses most of the value.
6. Never be afraid to take a loss.
7. Take small positions.
8. Exit a position when you feel uncomfortable.
9. Exit a position when the underlying scenario or trend
changes.
10. Diversify.
The two most important steps to follow are the use of a stoploss
and taking small positions. Without a stop-loss, the option
writer is doomed. Small positions will prevent you from taking a
hit that will wipe out your portfolio. Remember you want to be
able to return to fight another day!
Whenever you are writing options, especially naked options,
you must always be considering the worst case scenario. When
you write options, you win quite frequently and, as a result, tend
to relax when you should be in a disaster mode all the time, for
all you need is one bad hit to wipe you out. Always ask yourself,
“What is the worst thing that can happen to the position? Can I
handle it? What can go wrong?”
Here are ten defensive steps that I take to protect my portfolio
from a disastrous hit:
1. Use stop-losses.
2. Enter only high probability trades.
3. Write only short term options.
4. Write only overvalued options.
5. Cover positions when the option loses most of the value.
6. Never be afraid to take a loss.
7. Take small positions.
8. Exit a position when you feel uncomfortable.
9. Exit a position when the underlying scenario or trend
changes.
10. Diversify.
The two most important steps to follow are the use of a stoploss
and taking small positions. Without a stop-loss, the option
writer is doomed. Small positions will prevent you from taking a
hit that will wipe out your portfolio. Remember you want to be
able to return to fight another day!