Article How Do You Define Risk?

T2W Bot

Staff member
Dec 19, 2004
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#1
Key Points

Trading always involves some level of risk, but “risk” can be defined in many different ways.
Is it the probability of profit compared to the probability of loss? Or is it the amount you could earn compared to the amount you could lose?
Plus, how do you quantify risk? Is it the number of shares or the dollar amount?

Is options trading risky? This is a harder question to answer than you might think, because it depends upon how you define “risk.”
Most traders define risk in one of two ways. The first method is the probability of earning a profit versus the probability of incurring a loss. The second way is the amount of money you could lose compared to the amount of money you could earn. Let’s look at both.
Probability of profit vs. probability of loss For traders who define risk as the probability of profit vs. probability of loss, the amount at risk is generally a lesser consideration, because a loss is not anticipated. This type of...
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Lúidín

Active member
May 31, 2015
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#3
certain Options are far more riskier than outright stock as the trader has 3 variables to consider..namely direction..implied volatility and time decay..risk management is but one aspect of trading..although it is by far the most important aspect..the biggest problem with options trading is confusing price with value..the sucker will always think that a cheap price is good value..whereas the actual valuation is anything but..low delta options (OTM) are not good value..but..high delta options (ITM) can also be not good value..the best value options are usually ATM options..successful options trading is far from easy..and usually requires running a diversified portfolio short options book..with access to up to date implied volatilities for all instruments..if this is achieved..then the 80% rule can indeed be very profitable for those who have the money and know how to operate a short options book