Whether you’re buying or selling options, it’s essential to understand their risk profiles and how they function within your overall portfolio. Options can be used for income generation, protection, or a strategic blend of both. But to use them effectively, you must recognize their limits and the specific role they’re meant to play. Making informed decisions starts with knowing what each position is designed to do—and what it cannot.
There’s nobody better than Nassim Nicholas Taleb to convey the importance of risk profiles—or what he calls “expectancy.” While his focus is often on buying protection against significant, low-probability events, the lesson applies broadly: it’s not just about being right or wrong, but about understanding the asymmetry between potential gains and losses. In options, that difference is everything.
Related: Howard Marks