Using Options In Risk Management by Robert J. Hamilton
Before options were available, the primary vehicle used for risk management was the stop-loss order. Stop-loss orders allow a certain degree of risk management, but they don't allow the user to absolutely define the amount of risk. Nowadays, put and call options can be utilized to define and implement risk management. Learn these basic risk-management strategies using options.
In the past, when futures and securities were traded before options were available, the primary vehicle
with which to manage risk was the stop-loss order. Stop-loss orders allow sell orders to be placed below
the current market price and buy orders to be placed above the market price and are triggered only when
the market hits the designated price. When activated, the stop-loss order becomes a market order subject
to all the idiosyncrasies of the market. The nature of the stop-loss order allows a certain degree of risk
management, but it does not allow the user to absolutely define the amount of risk.