Manage Your Risk

Tip 9: Manage Your Risk

Managing risk well can be the difference between being profitable and losing money. While often overlooked, the concept is critical.

A well-defined risk management strategy has two parts:

• Clearly defined entries and exits
• Multi-leg options strategies

Traders can significantly increase profits using a data-driven framework to decide when to trim positions while winners run and when to cut losses early.

Traders can also manage risk by choosing lower-risk options like a vertical debit spread or vertical credit spread.

Institutions may take high-risk single-leg options contracts, but you don’t have to trade the exact contracts as institutions. Instead of trading the same contract an institution is trading, you can de-risk your trade in a few different ways:

• Multi-leg strategy with lower risk
• Longer expirations
• Closer to being at the money
• Stocks instead of options

Any or all of these will lower the volatility of the trade, making it easier to manage and increasing its chances of profitability.

Even if you’re not taking the exact trades as institutions, options flow is still incredibly valuable in predicting short-term market direction.

After you know the direction based on institutional activity, you can adjust the trade risk to match your tolerance better using any of the above strategies.