Add training workflow, datasets, and runbook
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Managing Trades
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Once the trade is on, the greeks come in handy for trade management. The
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most important rule of trading is Know Thy Risk . Knowing your risk means
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knowing the influences that expose your position to profit or peril in both
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absolute and incremental terms. At-expiration diagrams reveal, in no
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uncertain terms, what the bottom-line risk points are when the option
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expires. These tools are especially helpful with simple short-option
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strategies and some long-option strategies. Then traders need the greeks.
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After all, that’s what greeks are: measurements of option risk. The greeks
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give insight into a trade’s exposure to the other pricing factors. Traders must
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know the greeks of every trade they make. And they must always know the
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net-portfolio greeks at all times. These pricing factors ultimately determine
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the success or failure of each trade, each portfolio, and eventually each
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trader.
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Furthermore, always—and I do mean always—traders must know their up
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and down risk, that is, the directional risk of the market moving up or down
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certain benchmark intervals. By definition, moves of three standard
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deviations or more are very infrequent. But they happen. In this business
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anything can happen. Take the “flash crash of 2010 in which the Dow Jones
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Industrial Average plunged more than 1,000 points in “a flash.” In my
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trading career, I’ve seen some surprises. Traders have to plan for the worst.
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It’s not too hard to tell your significant other, “Sorry I’m late, but I hit
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unexpected traffic. I just couldn’t plan for it.” But to say, “Sorry, I lost our
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life savings, and the kids’ college fund, and our house because the market
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made an unexpected move. I couldn’t plan for it,” won’t go over so well.
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The fact is, you can plan for it. And as an option trader, you have to. The
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bottom line is, expect the unexpected because the unexpected will
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sometimes happen. Traders must use the greeks and up and down risk,
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instead of relying on other common indicators, such as the HAPI.
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