Managing Your Equity

Question 1

The principle of risk of ruin applies to:

a) trading weekly options
b) all forms of trading
c) all decision making
d) all of the above

Answer 1

c) all decision making

Question 2

Weekly strategies that give you unlimited reward and limited risk require:

a) more risk capital than credit spreads
b) more risk per trade than credit spreads
c) less risk per trade than risk reversals
d) only a and b

Answer 2

d) only a and b

Question 3

The higher the variance, the greater:

a) the length of winning streaks
b) the length of losing streaks
c) the amount of risk per trade
d) the amount of loss per trade

Answer 3

b) the length of losing streaks

Question 4

The lower the variance, the greater:

a) the length of winning streaks
b) the length of losing streaks
c) the amount of loss per trade
d) the amount of risk per trade

Answer 4

a) the length of winning streaks

Question 5

If you are trading correctly, your equity curve should:

a) always be going up
b) resemble a bull market with a positive slope
c) usually be in congestion
d) never dip below its mean

Answer 5

b) resemble a bull market with a positive slope

Question 6

Risk capital is money that:

a) will not change your lifestyle if lost
b) can be risked in investments
c) is only used for trading
d) all of the above

Answer 6

d) all of the above

Question 7

What is volatility?

a) the amount of uncertainty in the market
b) the amount of air in the balloon
c) affects the amount of risk capital you have
d) all of the above

Answer 7

d) all of the above

Question 8

What is the win rate?

a) the percentage of winners you pick
b) the average size of the winning trade
c) the average loss in any trade
d) all of the above

Answer 8

d) all of the above

Question 9

As a rule of thumb regarding risk capital:

a) You can risk as much as 10 percent in any trade if you are aggressive.
b) You should never risk more than 15 percent in any one trade.
c) You need to have capital of at least 30 times your risk in any one trade.
d) All of the above are true.

Answer 9

c) You need to have capital of at least 30 times your risk in any one trade. A trade that risks $500 requires a portfolio size of at least $15,000

Question 10

How many trades can you have open versus your risk capital?

a) as many as you can manage, as long as each one has risk limited to 3 percent
b) no more than 10, because you cannot manage more than that
c) no more than 3, because of SEC rules
d) no more than 1, as long as your broker approves it

Answer 10

a) as many as you can manage, as long as each one has risk limited to 3 percent