Risk Management Is Key to Day-Trading; Most Traders Consider the Most Important Aspect of Day-Trading Last of All: Risk Management. These Simple Guidelines Will Help You Embrace Risk Management and Survive to Trade Another Day

Busby, Thomas L., Futures (Cedar Falls, IA)

If you want to know something about the fallout from poor risk management, consider this personal account.

In 1987, I lost everything.

On Oct. 19, 1987, my life was rosy. I was a vice president of a major brokerage firm. The family was doing great. I had a nice house, cars and other amenities that a cushy income could provide. By the time I crawled back under the covers that same evening, however, I was broke. The Dow Jones Industrial Average had plummeted more than 500 points, losing approximately 22% of its total value. Across the board in the United States and around the world, the financial markets took a nosedive. My portfolio crashed with them.

[ILLUSTRATION OMITTED]

I was heavily invested in options. On Thursday, Oct. 15, 1987, I was long 1,000 S & P 100 puts, but I was also short 1,000 S & P 100 puts. I had some protection because the short position offset the long one. The offsetting positions were supposed to be my insurance against calamity.

However, all of that changed on the following day, Friday, Oct. 16 when my long positions expired. The short positions still had a month to go. That left me with naked options; in other words, they had no cover. I had sold 1,000 puts that I did not own and I had guaranteed a buyer that I would deliver if the strike price was hit.

On Black Monday, the strike price was hit and I had to produce. I was forced to buy them at a high market price, even though the market was dropping like a ton of bricks. If I had been able to hold my long puts for one more week, I would have made millions of dollars, but in October 1987, the market did not wait for me. I was a couple …

Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Risk Management Is Key to Day-Trading; Most Traders Consider the Most Important Aspect of Day-Trading Last of All: Risk Management. These Simple Guidelines Will Help You Embrace Risk Management and Survive to Trade Another Day. Contributors: Busby, Thomas L. - Author. Magazine title: Futures (Cedar Falls, IA). Volume: 36. Issue: 15 Publication date: December 2007. Page number: 38+. © 2009 Summit Business Media. COPYRIGHT 2007 Gale Group.

This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.