Trading Master Class With ExpertsRisk and Reward in Options
Options provide defined risk for buyers and potential risk for sellers:
Buyers: Maximum loss = premium paid, profit = theoretically unlimited for calls, limited for puts.
Sellers (writers): Maximum profit = premium received, risk = potentially unlimited for uncovered calls, high for puts.
Example:
Selling a call without owning the stock (naked call) can lead to unlimited losses if the stock skyrockets.
Buying a put limits risk but can still profit from sharp downward moves.
Hedging with Options
Options are a powerful tool for hedging investments:
Protective Put: Buying a put on a stock you own protects against a decline.
Collar Strategy: Buy a put and sell a call to limit both upside and downside risk.
Portfolio Insurance: Large investors use index options to protect portfolios during market volatility.
