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Buying calls and puts with defined risk

Turning a stock setup into a long option trade.

10 min · Beginner

What you'll learn

• Build the stock level plan before choosing any option
• Size a long option position so the full premium at risk is no more than 1% of the account
• Translate stock-level entries, invalidation and targets into option exits

Key takeaways

• The stock setup comes first; the option is just the vehicle.
• A long option's maximum loss is the premium, which makes risk defined.
• Size so that the full premium at risk is no more than 1% of your account.
• Exit on stock signals: invalidation close, next-level target, or time stop.

Glossary

• Defined risk — A position where the maximum possible loss is known in advance, such as the premium on a long option.
• Premium at risk — The total premium paid for a position (premium x 100 x contracts), treated as the maximum loss.
• Time stop — A rule to exit a trade by a set date if the expected move has not started.

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