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Chapter 2. Option Basics > Option and Stock Volatility: The Central Element of ...

Option and Stock Volatility: The Central Element of Risk

The whole question of risk is central to the options decision and to maintaining the conservative structure and theme in your portfolio. The selection of options can be directly related to price volatility as one measurement of risk, perhaps the most important.

When you pick stocks, you decide whether to follow fundamental or technical indicators, or a combination of both. Conservative investors tend to lean toward the fundamentals, so you probably prefer financial statements to charts and price trends. However, with options, you face a different criterion for judging safety. Because options have no tangible value of their own, there are no fundamentals specifically related to options. The stock fundamentals are crucial for picking stocks, especially if you plan to write covered calls. However, for options, you need to compare volatility to determine safety and risk levels.


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