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Using Options As a Primary Alternative

When a swing trader uses an option as a primary alternative to a stop loss, the intent is to reduce or diminish any exposure to loss while at the same time staying one step ahead of the market. This is directly tied into the money management plan that is already in place. Large money managers will have in place a standing risk of loss that can’t exceed 2 percent of their account value, while individual traders may be more liberal, allowing as much as 5 to 10 percent of their accounts to be at risk at any given time.

Options: An Alternative to the Stop

There is no other way to say it. There is no other way to look at it. No matter how clever you are at placing a stop loss, if it is triggered that simply means that you are on the losing side of the market. This can be frustrating, particularly when swing traders thrive on the exact type of market scenarios that stops are weak in.

Getting the Right Options for the Job

Understanding option selection, having an idea about delta, and being able to calculate the savings, values, and gains of the various options form the essential foundation needed to utilize any of the ideas presented here. By beginning with straddles and strangles you are able to play around with using puts and calls as a risk management strategy without feeling like you are betting the farm. It is important that you have a grasp of choosing the right options to work in tandem with your spot, futures, or margined position.

Strategies That Can Protect Your Trading Position

When it comes to the stock market, there are many ways to protect your trading position. You can purchase a stock that doesn’t follow the S&P 500 and short the S&P 500. Single stock futures can be combined with stock options or stocks to create synthetic or collar opportunities.

Option Hedge Into a Collar Position

Options can be an alternative to using a stop loss. The goal is to show the difference between a pure synthetic option, an at-the-money option and a futures position versus an option hedge, and an out-of-the-money option and a futures position. Using an option as a hedge is a great way to lock in your money management strategy.

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