Path dependency and options

By buying options, we trade path dependency for time dependency.

Options are the most comprehensive tool for risk management. When applied wisely, they are the ultimate Alpha generator. Therefore, options hold a special place in my toolbox.

So, it's time for a write-up on options. Today, we go back to elementary school and recall the first of three variables describing the motion of a physical object: distance, velocity, and time. Price movements are also subject to description with these parameters, which are the essence of technical analysis and risk management.

In the first case, they are part of the Big Five in price – direction, magnitude, volatility, probability, and time. In the second, they describe options as a risk management tool. Today, I reflect on the first advantage of long call options—they do not need a stop loss.

All principles, formulas, and tables discussed below apply only to long positio…