V. 22:2 (34): Explore Your Options by Tom Gentile

V. 22:2 (34): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile

CURBING LOSSES

I understand that options can provide less risk than stocks since the capital outlay is much smaller, but when the underlying moves against you, options tend to lose money more quickly. Is there any way to curb the rate of these losses so as not to get stopped out so quickly?

This question is actually a twoparter. First, letís address the assumption that the losses occur more quickly. This is actually a fallacy, in part because of the leveraged nature of options. Since the purchase of one option contract that controls 100 shares of the underlying can cost far less than the stock itself, inexperienced traders assume this simply frees up more capital to purchase many more option contracts.




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