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Chapter 7. Option Strategies in Down Mar... > Stock Positions and Risk Evaluation

Stock Positions and Risk Evaluation

If you want to coordinate your various portfolio management requirements by using options, you must first classify risks and keep them in perspective. Inexperienced options traders commonly forget to pay attention to stock fundamentals, picking options in isolation. Even if a speculator uses only long-option positions and never buys or sells stock, fundamental analysis invariably affects (a) the success of an option trade; (b) pricing trends based on support, resistance, and overbought or oversold conditions; and (c) timing of purchase and sell decisions for options.

Risk evaluation of stock based on both price volatility and fundamental volatility (levels of period-to-period changes in revenue and earnings trends) are at the heart of risk analysis. The two types of analysis—technical and fundamental—are directly related and have a cause and effect on one another. The tendency to look at only one set of indicators is a mistake because to truly understand the causes of market trends, you need both.


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