Everyonehas heard about the "sure thing" of low-risk or no-risk options strategies.
But in reality, some risks may be lurking in the background, just out of sight but
ready to pounce.
What this means is that some traders, whether new to options or experienced, may
convince themselves that they have found the sure thing and that all risks are
covered. So conservative strategies like the widely popular covered call or the
basic collar, may appear lower-risk than they really are. These hidden risks
are found in all kinds of trading activity, but in the options market, a
low-risk delusion can be very expensive.
Wisdom often comes at great expense. I can attest to this personally. I’ve been
trading options since about 1978, and my three decades-plus experience has
given me time to make just about every mistake an options trader can make.
It has helped me to realize that, as Konrad Adenauer wrote in The Churchman
(January 15, 1957),"The good Lord set definite limits on man’s wisdom,
but set no limits on his stupidity – and that’s not fair!"
Adenauer was right about that. I wonder if he traded options?
Michael C. Thomsett
About this week’s Heavy Hitter Michael C. Thomsett is a widely published options author,
with six options books in print, published by John Wiley & Sons, FT Press, Amacom Books, and
Traders Library. He blogs at FT Press and his website is www.MichaelThomsett.com.