V.18:3 (28-32):Let Options Pay For Your Stops by Joe Luisi

Let Options Pay For Your Stops by Joe Luisi

Want to get into positions with good risk-return ratios and firm boundaries of gain and loss? Look no further: Here’s a technique for having it all — or most of it, anyway.

You know you should use stops, but they cause losses, don’t they? Would you use stops if you could minimize or even erase those losses by selling options? Would stops look better to you then? Sooner or later, every trader comes to realize that he needs to use stops. It doesn’t matter if you’re a short-term trader or a longer-term trader; stops are essential for the preservation of capital. In addition, using a stop makes you be very specific about the point at which you’ll admit you were wrong about a trade. But is there a way that you can somehow reduce the costs of stops? Better yet, is there a way to make money even if you get stopped out?

Enter, if you will, the wonderful world of options. Options have become so popular that almost every futures market offers them,and more than 2,000 stocks do as well. I’m going to assume that you have a basic working knowledge of options, and I’ll show you how to use them to help cover the costs of your stops.