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 ------------------------------------------------------- Risks with Options ------------------------------------------------------- There are those that say options have more risk than buying the underlying stock. I suppose these are the same people that recommend a buy and hold investing strategy! The risk involved with any option strategy is the premium paid for the option. The risk involved with the purchasing stock in the price paid for the stock. Until very recently, no one ever expected to lose all of the money invested in a share of stock. One only has to look at ENRON, WorldCom and many other recent examples to know that even publicly traded companies can and do go bankrupt! All investing involves cash and risk management. By taking charge of your investing you assume responsibility for implementing techniques available to you to manage your cash and risk. Options allow you to buy more shares of stock at affordable prices than actually purchasing the shares of stock. As of the writing this article, shares of Omnicom Group Inc. (OMC) are selling for $65.59. Purchasing 500 shares of OMC stock would cost you $32,745 plus commissions. Buying 5 (500 shares) option contracts of OMC April $65 calls have a cost of $8.40 or $4,200. Options allow you to control 500 shares of OMC for $28,545 less than buying the shares of stock. Managing risk involves understanding why you bought Omnicom Group Inc. in the first place. Research tells you as of the writing of this article Omnicom Group Inc. demonstrates a thirty-day price cycle. Historically OMC moves up 20% in 21 days then moves down 15% over nine days. OMC currently is on the tenth day of its 21-day up cycle with $3.52 left in its historical cycle. Based on the research OMN could produce a good profit! During the last five trading days OMC has had an average daily trading range of $3.13. The daily five day average difference from the opening price to the low for the day has been $.82. Certainly we must expect a low of $65.59 - $.82 = $64.77. Allowing for unforeseen price changes of 3% ($64.77 * 3% = $1.94) our stop loss for this trade would be $64.77 - $1.94 = $62.83. Should the stock price of OMC hit $62.83 the options should be sold. Our true amount of cash at risk would be the difference between the purchase price and stop loss price $65.59 – 62.83 = $2.76 or $2.76 * 500 shares = $1,380. Notice measuring option risk involves analyzing the stock price. Since option premiums are a multiple of stock prices we manage to the stock price not the option price. uses a stop loss order on all transactions thus limiting the amount of loss we are willing to absorb. The entire option premium will only be completely at risk when a stop loss order is not used! Each evening after the market closes, move the stop loss price up as the price of the stock moves up and you lock in your profits in the trade! Want to learn more about risk management and maximizing profit techniques – click here?  While others shy away from stocks in a range bound pattern, we find steady and dependable profits week after week. Whether your preferences are stock or option plays we have the research you need for consistent profits? Join now!  Back | The Basics | Risks With Options | Options Strategy | | Range Bound | Continuation | Strategies | Practice Trades | Performance | Cancel | Options | Useful Links | | Order Now | Return Home | Home Business | Digital Economy | Sign In | Disclaimer | Training Center | FAQ | What's New | Contact Us | |
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