Risk Management 101

🛡️ Risk Management 101

Successful trading isn’t just about making profits—it’s about protecting your capital. Risk management is the backbone of every smart trader’s strategy, especially in options trading where leverage and volatility can work both for and against you.

🔹 What Is Risk Management?

Risk management is the process of identifying, analyzing, and controlling potential losses in trading. It's not about avoiding risk entirely, but managing it wisely to avoid catastrophic outcomes and preserve capital over the long term.

🔹 Why It Matters in Options Trading

Options are leveraged instruments—small price changes can lead to big swings in value.
Time decay (theta) and volatility shifts (vega) can erode positions quickly.
Unmanaged trades can wipe out an account in a few bad moves.

Bottom line: Even the best strategy fails without a risk plan.

🔹 Core Risk Management Principles

Never Risk More Than You Can Afford to Lose: Only trade with money you can afford to lose—never use emergency savings or borrowed funds.
Position Sizing: Risk a small portion (e.g. 1–2%) of your capital per trade.
Set Stop Losses & Profit Targets: Predetermine your exit points to avoid emotional decisions.
Use the Risk/Reward Ratio: Aim for trades with reward greater than risk (e.g. 1:2 or better).
Diversify Your Trades: Don’t put all your capital into one trade, sector, or strategy.
Know the Greeks: Understand delta, theta, vega, and gamma to manage trade exposure better.

🔹 Types of Risks in Options Trading

Risk Type	Description
Market Risk	Price movement goes against your position
Volatility Risk	Implied volatility changes affect option value
Time Decay	Option value reduces as expiration nears
Liquidity Risk	Difficulty executing trades due to low volume
Execution Risk	Issues with order fills, slippage, or human error

🔹 Simple Risk Management Example

Suppose you have ₹100,000 in trading capital:

Following a 2% risk rule = ₹2,000 risk per trade
You enter a trade costing ₹5,000 with a 60% stop-loss = ₹3,000 loss risk
Too risky → adjust position size or skip the trade

👉 Result: You stay within your limits and protect capital.

🔹 Trading Psychology & Risk

Stick to your trading plan
Accept losses calmly—avoid revenge trades
Stay consistent, and manage emotions

💡 Final Thought: Risk management isn’t a feature—it’s the foundation. Every trade should be sized, planned, and managed with the mindset of survival first, profit second.

📈 “Amateurs focus on rewards. Professionals focus on risk.”

Option Oven