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Diversification

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Diversification with options is a critical component to success. We can diversify by the following:

  • Underlying
  • Strategy
  • Implied Volatility
  • Trading Small

Diversify by Underlying

Selling premium on various uncorrelated underlyings provides a cushion to protect against constructing a portfolio of all winners or all losers for a given cycle.

Diversify by Strategy

Strategies have historical correlations; this is used so that returns from various positions are not too correlated.

Trade small with multiple underlyings

This helps to mitigate the binary nature of single stock risk.

Join Tom and Tony in today’s tastybite as they walk us through this basic but critical component of trading.

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