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Risk Appetite and Options Trading
Options trading is well known for its leverage and versatility. Through its hundreds of options trading strategies as well as countless ways of exploiting its leverage, optionstrading can be adapted for any trading style and any trading objective. Since it is soversatile, how should an options trader choose the most profitable way to trade options?Most options trading beginners read amazing stories about how some people makemillions trading options in a certain way and then try to duplicate what those people doonly to be greeted with defeated. Indeed, what works for others may not work for you.Why is that so? It is because success in options trading requires a matching of the rightmethod with your risk appetite!An options trader’s risk appetite decides when the options trader’s emotional button, or  panic button, gets hit. When the panic starts, everything screws up. This is why optionstrading methods that work for some people don’t work for others.Below, I shall provide a general guideline on what options trading method matches eachkind of risk appetite and fund size.Big Fund, Big Risk AppetiteWhen you have a big fund and a big risk appetite, you might want to optimize your returns by swing trading with options using the majority of your fund. You may also use asmaller portion of your fund to placeout of the money  bull call spreadsor  bear put  spreadson stocks that are likely to stage a significant breakout due to earnings release or take-over.Big Fund, Small Risk AppetiteMost options traders fall into this category and are people with hard earned savings whoaim to make a small reliable income while taking as little risk as possible. Such peopleshould use low risk position trading strategies such asCovered Callsor theRide The  Flow strategyin order to produce a small residual income monthly without the need for active trading.Small Fund, Big Risk AppetiteIf you have a relatively small fund and is willing to take big risks with it, you may wishto day trade options by identifying stocks that will move within a day and then maximizeyour exposure usingin the money options, selling them the moment the stock turn againstyou within the day itself and then move on to identifying other opportunities, all within asingle day. The aim is to make as many profitable trades within a day and stop if your loss limit is hit for the day. This strategy is not that productive for bigger funds due to therelatively low level of liquidity of options which may not be able to fill extremely big positions quickly.
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