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Chapter 3. Options in Context > The Nature of Risk and Reward

The Nature of Risk and Reward

Any assessment of an investment decision has to involve a study of risk and reward. Your conservative approach to investing is based on your sensitivity to risk as a primary means for all of your decisions. You are less likely than the typical investor to react to sudden market changes out of panic or greed; your view is long-term. Rather than watching index-based and volume trends every day, you track a company's fundamentals. You base your decisions on earnings reports, capital strength, and operating trends. The stocks you currently hold will be sold if and when you determine that the fundamental strength of the company has changed or if you locate another company whose stock is a better candidate for long-term growth and safety.

When options are involved, the risk equation changes. You are likely not only to alter your investing profile to take options-based risks in some circumstances, but to use options to protect paper profits without selling or to reduce your basis in stock to create downside protection. The proper use of options can increase the conservative nature of your portfolio because some strategies protect existing positions against loss.


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