Tastylive: 3 Methods to Test if You’ll Blow Up Your Portfolio
Risk is one of the most important concepts in investing. One of the biggest risks is having a portfolio position lose all its value. For stock investors, diversification is the key to avoid the danger from any single company from impacting their portfolio.
Traders who use vehicles such as options can vastly increase the risks to their portfolio. That’s because option trades can magnify potential returns and losses. And some strategies can wipe out a portfolio with even a small move.
While investing in the stock market carries long-term probabilities, shorter-term trades can be more dynamic and volatile.
Ultimately, traders must look at risk as higher for shorter-term trades, and take a more cautious approach. That means allocating smaller amounts of capital to a trade the less time it has to play out.
Options traders may also want to use tools such as strangles or credit spreads for shorter-term trades. Those types of options strategies can have a lower maximum loss, even if it means a smaller upside.
The best approach for traders is to look at historical trends. Understanding how worst-case losses have played out in the past on a trading strategy can provide a clue.
Given the higher risks of short-term trading, options traders should start small and scale up with their portfolio in time.