By: Tom Gentile
on December 19th, 2022
For your Consideration: Cost as Risk
Here is a consideration for you on how to manage your trading and Risk/Reward: There a couple of ways one can go about a stop loss.
- Use a percentage stop loss, or
- Use cost as risk
We teach and use case studies based on a theoretical 25k account in which no more than 2% is at risk on any one trade, meaning no more than $500 risk per trade.
If you go with a 50% stop loss rule that means one can set up a trade that cost $1,000 and at a 50% stop you would lose $500 but preserve the remaining $500,
But… how many times have you stopped out at a 50% stop only to see the trade turn around and work? Frustrating, right?
Cost as Risk
How about spending only your max risk or $500 on the trade to begin with. You will have less contracts and therefore less profit potential, but you will not have an arbitrary stop loss percentage potentially taking you out too soon if you are willing to risk the full $500.
This way the market and your position’s underlying security can bounce around all it wants and unless its value reaches zero you can maintain the trade and stay in it a bit longer, giving it a chance to work out.
It keeps you from having to over-manage it and all its gyrations as well. This should result in less stress in your trading, which we find is a benefit utilizing Cost as Risk in our options trade management.
Position-Sizing Example: if your ‘max risk’ is $500 and the cost of one option is $2.50, that would allow you to ‘open’ two contracts, equaling $500 cost.
Go with the one you find suits your personality best.
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
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