cluding multiple commissions, which may
impact any potential return.
Using the order entry tool, you can see
how different verticals at different strike
prices have different max losses. Some might
be bigger than others, but they’re all defined.
No matter whether the stock price goes infinitely high or to zero, a short vertical’s loss
won’t exceed the max amount you see.
Above all, your risk tolerance is naturally
your own decision. As a self-directed investor, you always control when, what, and how
you trade. By controlling the max loss using
defined-risk trades, you can be confident
that even if all your trades are losers, your
account might still have some value. For example, if your account is worth $5,000, and
you have three defined-risk trades each with
a max loss of $250, the worst-case scenario
is each of them losing $250 for a total loss
of $750, plus commissions. So your account
would still be worth roughly $4,250.
You’re afraid to jump in (and jealous
of those who are going for it).
OK, maybe it’s not exactly fear. But it stinks
when you see people around you making
money when you’re not in the game, especially in bull markets. You know the threat of
loss is real, despite your expectation that the
market could move even higher. You’re afraid
of making a mistake, or getting in too late.
Of course, telling someone to “have no fear”
is easier said than done. But it doesn’t have to
be all or nothing. You might convert your fear
into thoughtful, informed trading strategies
that don’t break your bank in one day. Is risking, say, $300 on a single trade acceptable if it
means you slow things down a bit, participate
in the growth of the market, and focus on
strengthening your portfolio for the future?
(Yes, trader—we do mean investing for the
long term, here. But it’s not what you think.)
Let’s take an example.
Assume you’re bull-
ish on the market and
you think it’s going to
move even higher. The
“market” can mean a lot
of things. But to many
investors and traders, a
good proxy is the S&P
500 Index (SPX). It
tracks the value of the
Maybe a short put vertical in SPX options.
This would be short an out-of-the-money
(OTM) put, and long a further OTM put.
With the SPX at, say, $2,410, a short put vertical could be short the SPX 2390 put, and long
the SPX 2385 put. If that 2390/2385 put vertical is worth $2, selling that put vertical generates a $200 credit. That’s your max potential
profit (not including commissions), which
you’d realize if the SPX price is anywhere
above $2,390 at the options’ expiration.
The max potential loss on that short
2390/2385 put vertical is $300, and that loss
would happen if the SPX price is anywhere
at, or below, $2,385 at the options’ expiration. Even if the market crashes badly and
the SPX goes to zero, the most this
trade will lose is $300, not including
Only you can decide whether you think
the SPX will go higher. There are lots of
other bullish strategies to choose from. But
this example of a short put vertical should
put at least some of your fears in context.
SWIM WITH THE REST
Of course, no one wants to lose money, and
options trading involves unique risks and
isn’t appropriate for everyone. But if you’re
looking to invest in your future and potentially realize better returns than from a savings account, you may have to engage some
risk. Above all, the wealth of trading technology today means you’re never alone. Once
you get more comfortable with investment
decisions and risk/reward equations, you’ll
likely trust yourself more, so that trading
your own money starts to feel familiar and
often worth it.
FIGURE 1: Get comfortable placing orders. There are many different types of trades. It’s worth your while to
experiment with things like vertical spreads, naked calls, or naked puts. Source: thinkorswim from TD Ameritrade.
For illustrative purposes only.
FIGURE 2: Know your max loss before you trade. In the Order Confirmation Dialog box, you can determine what
your trade’s max loss and max profit is likely to be. Source: thinkorswim from TD Ameritrade. For illustrative purposes only.
For more information on the general risks for trading
and trading options, see page 37, #1– 2.
To check your
account status in
tab, then Account