Options – Risk Management
There are more kinds of risk than there are investments, since every instrument carries several kinds. But risk isn’t inherently bad. Without it there’d be fewer opportunities for profit.
The fundamental risk, of course, is price uncertainty. No one knows for sure whether GOOG (the symbol for Google stock) will be higher tomorrow or lower.
Options, like futures or bonds, carry an additional risk – at some point, from a day to several months or years, they expire. On or before that date, the holder has to decide whether to sell the contract, exercise the option to buy or sell the underlying asset, or simply let the option expire.
Each of these choices carries implications for gain or loss and all are uncertain (to some degree) with respect to the size of that outcome.
Complicating the price and timing risks of options is their volatility risk. It’s uncertain, on any given [...]
Original post by Michael Mobley and software by Elliott Back
