Knowing how and when to evaluate and control risk

Trading is commerce, and commerce is the relationship between the markets’ vast number of buyers and sellers—all aiming to end the day with a profit. Some will win, and others will not.

As in all of the many manifestations of commerce, trading has rules for success. They’re the mechanics that drive the outcome. While these guidelines differ depending on the business, success does not happen by accident.

One aspect of the “mechanics of success” is knowing how and when to evaluate and control options trading risk.

This cheat sheet can serve as a guide on how to approach risk in the options market. The goal is to set realistic expectations through repeatable mechanics, that are rooted in mathematics and statistics. 

Mike Hart, a former floor trader at the Chicago Stock Exchange and a proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team. @mikehart79