Limited Risk or Limitless Risk
Basic options trades can be either long or short, and can have two different risk to reward ratios. The risk to reward ratios for long and short options trades are as follows:
Long Trade
Entry type: Buy a Call or a Put
Profit potential: Unlimited
Risk potential: Limited to the options premium
Short Trade
Entry type: Sell a Call or a Put
Profit potential: Limited to the options premium
Risk potential: Unlimited
As shown above, a long options trade has unlimited profit potential, and limited risk, but a short options trade has limited profit potential and unlimited risk. However, this is not a complete risk analysis, and in reality short options trades have no more risk than individual stock trades (and actually have less risk than buy and hold stock trades).
Basic options trades can be either long or short, and can have two different risk to reward ratios. The risk to reward ratios for long and short options trades are as follows:
Long Trade
Entry type: Buy a Call or a Put
Profit potential: Unlimited
Risk potential: Limited to the options premium
Short Trade
Entry type: Sell a Call or a Put
Profit potential: Limited to the options premium
Risk potential: Unlimited
As shown above, a long options trade has unlimited profit potential, and limited risk, but a short options trade has limited profit potential and unlimited risk. However, this is not a complete risk analysis, and in reality short options trades have no more risk than individual stock trades (and actually have less risk than buy and hold stock trades).