What does "risk management" entail in options trading?

Risk management in options trading involves implementing strategies that aim to minimize potential losses, ensuring that traders can protect their capital while participating in the market. It focuses on identifying, assessing, and prioritizing risks and then taking steps to mitigate them. This could include using techniques such as setting stop-loss orders, diversifying a portfolio, or employing options strategies like hedging, which can offset potential losses on other investments.

By concentrating on minimizing losses, traders can sustain their trading activity over the long term, which is essential in the often volatile environment of options markets. This proactive approach allows them to optimize their overall risk-reward profile rather than simply chasing maximum profits.

Other options, such as maximizing potential profits or investing in a single position, do not encompass a holistic approach to handling risk and could lead to significant losses. Avoiding all types of investment risk is impractical since all investments carry some level of risk; the goal is to manage and mitigate those risks rather than to eliminate them completely.