Every trader is different. Traders have different investment objectives and different expectations regarding the returns on their trades. Experienced traders know that increasing the return on an investment involves increasing risk. Just how much risk a trader is willing to take depends on how much capital is available, how much a change in capital can effect one's lifestyle, the amount of conviction that a stock will move in the desired direction, and other psychological factors. A trader with a nominal tolerance for risk and a strong conviction that a stock will rise may opt to buy the stock.
A more conservative trader may sell a covered call, and a more aggressive trader may buy a call. Some Notes About Risk A trader with a strong conviction that a stock will rise can choose from many types of trades to try to profit from a rise in the stock price.
Consider three different trades, a stock purchase, a covered call, and a call purchase. All three trades profit if the stock moves up. The center line represents the current price. The probability of the future price being greater than the current price is the area underneath the curve to the right of the center line which is. The probability of a future price being far from the current price is small. The at the money call is only profitable when the price rises above the current price plus the cost of the call.
Unlike the call purchase, the stock and covered call purchases put a lot of capital at risk. If the only criteria for measuring risk is the amount of capital exposed to loss, then purchasing the stock is the riskiest trade of the three. The measurement of risk has to take into account the probability of the future price, and how much loss is expected to be incurred given that the stock price moves against you. When risk is measured by the probability of loss, or expectation of loss, then buying the call is the riskiest trade.
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