Thinking beyond the traditional view of risk as being related to a strategy, there is another way: to see risk as a matter of when and how you place an option trade.
In this definition, a strategy is not necessarily high-risk or low-risk. It is a matter of checking implied volatility and probability to time entry and exit. This is a new and interesting way to view risk. It can even lead to viewing “safe” strategies like covered calls as high risk if they are opened at the wrong extreme on the volatility scale, with the wrong strike, or at the wrong expiration. Just as interesting, a “risky” strategy like an uncovered call could become relatively conservative if opened and closed at skillfully picked moments on the volatility cycle, the expiration swing, and the probability level.
The exciting aspect of this redefined way of looking at risk is that it becomes a variable. No single strategy can be exclusively assigned a risk level because its true risk depends on its implied volatility, probability, and of course proximity and timing (strike to current value of the underlying and selection of an expiration). Even long-time options traders may reconsider how they view risk itself. The traditional and widely accepted definitions do not apply in every case, and assuming a particular strategy is always defined in terms of its inherent risk is a mistake.
A few of the basic traditional conservative option trades include covered calls, protective puts, collars, synthetic long or short stock, and buying LEAPS calls as a form of contingent future purchase (or selling LEAPS puts to expand insurance and provide contingent future sale while preventing losses if and when the underlying loses value).
Here’s the problem. If you enter these trades or exit them at the wrong point in the cycle of volatility, you have been chasing conservative trades that might actually be high-risk. These typical conservative strategies are, of course, safe compared to uncovered calls or short straddles opened at the same volatility level. But the question of how you define “conservative” and where you identify risk opens up a lot of questions about options trading itself. Remember the proposed definition of conservative: a strategy or strategies designed to reduce risk while increasing profit.
Even a basic analysis and comparison reveals that some “high-risk” strategies, like short puts, for example, may be quite safe compared to perceived “low-risk” strategies that actually expose you to greater market risk. For example, exposure in short options is easily reduced by closing, rolling forward or covering one or both sides based on price movement. Time decay could make this short-term short position very conservative.
This is food for thought.
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