Frequently Asked Questions
Market Lab Report
If I use options as a stock substitute, How should I calculate the 7-8% stop loss rule? A movement of 7-8% on an option usually doesn't mean much.
You should calculate it on the basis that 7-8% is your maximum permissible loss on your trade. If the volatility is far greater such that you would get whipsawed out of your position, then you must increase your maximum risk tolerance level, but reduce your position size so the net loss to your account does not exceed your maximum permissible loss on your whole account based on this one trade.
Published: Jan 24 2011