Risk Management refers to the strategic risk that we take when trading options. This covers everything from our trade size, to our strike selection, product choice and type of strategy. We are able to control all of these factors in order to increase our probability of success and avoid large drawdowns in our account.
We are able to manage risk by strategy selection in different implied volatility(IV) environments. Normally, we will not look to sell options when IV is low and may look to become more aggressive with our strategy, size and strike selection when IV is high. We are also able to manage risk by trading liquid products so that we are able to enter and exit the trade at our price. Depending on the strategy, we are able to mitigate some of our portfolio risk by trading a number of products that are uncorrelated or negatively correlated. By doing this, some positions will profit when others experience losses. By staying mechanical in our trading approach, we are able to manage our risk in order to avoid detrimental drawdowns.
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