I have done options occasionally for abit. I have always heard traders saying to use small portion of your capital per trade. However, as I'm relatively new, I'm not intending to invest a huge capital.
Let's say I have a capital of 1.5k. I purchase a call option for USD1000. I set an immediate stop loss of USD900, intending to sell at 1.2k.
Does this means "essentially" I'm risking 10% of my capital for 20% gains, WHILE "leveraging" on my capital of 1k instead of 1.5k? Does this make sense? Do I make sense? Or am I delusional?
Does this perspective make sense?
byu/PreferenceDazzling33 inoptions
Posted by PreferenceDazzling33
4 Comments
No. A stop loss order is just a market order triggered when the defined price is met.
A market order is not guaranteed to be filled at a given price, but rather the highest bid if you’re selling or a lowest ask if you’re buying, which means if there’s a huge spread you could potentially be filled at a very different price than you intended.
Also, the order could be triggered by the spot price reaching the trigger for just a second and you’d be left wondering what happened.
All of the above is exacerbated in illiquid stocks and especially in illiquid options…
You’re still risking more than $100. What happens when Trump tweets something or you hold overnight and the price of the underlying tanks and no one wants to buy your option for $900? You’ll sell at the bid which could be $500 or $5? Well you just lost much more than $100. Of course, the opposite could happen too and you sell for more than $1200 but you’re fooling yourself if you think you’re only risking $100
If you buy a call option for USD1000, you are risking USD1000. I’m not saying you shouldn’t do that. Anything worth doing is worth doing right so be sure it’s worth it. One way to do that is if there’s a leveraged etf for the stock you can grab an exploratory call for USD100 so you’re only risking USD100 and less risky than going further out of the money or shorter expiration. If it’s a winner build your position. If it’s a loser then dump it immediately and find the next.
There’s different things they could be talking about here.
Typically you don’t want to tie up too much capital in one trade because that results in poor diversification and opportunity cost.
10% of a 10,000 account means you should only spend 1k on a position.
The other aspect is risk management. You don’t want to lose too much in one trade that makes it hard for you to recover. It’s possible but unlikely someone was telling you to risk 10% of your account on a single trade. Of course it depends exactly what strategy you’re following.
Also be mindful that options may easily blow through your stop loss or even trigger it and reverse because of how quickly prices can move. As a stop loss, many traders employ the use of option spreads.