Authors Frank Peelen
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1/14
Excellent question!
"Risk/reward ratio" is a term used in investing, but it's rarely quantified like one would quantify a debt/assets ratio. Risk/reward ratio is usually used more intuitively.
2/14
Usually people will use all their knowledge to make guesstimates about an investment like:
- 20% chance to go bust
- 20% chance to break-even
- 40% chance to double
- 10% chance to 4x
- 10% chance to 10x
And then state "for me, this is good from a risk/reward standpoint".
3/14
That last statement will be different for each individual though. For some people the investment laid out above may be great from a risk/reward standpoint, because of the high expected ROI. For others, it may be terrible because of the 20% chance to go bust.
4/14
Investing is much more complex than just making money and maximizing returns, and investment strategies should differ from individual to individual. If this is news to you, I strongly suggest you read through the first section of this blog
5/14
The final section of the same blog post goes into depth on $TSLA call options, and how I go about evaluating them. There is even a subsection called "The Risk Reward of Call Options" that should answer a lot of your questions.
Excellent question!
"Risk/reward ratio" is a term used in investing, but it's rarely quantified like one would quantify a debt/assets ratio. Risk/reward ratio is usually used more intuitively.
@FrankPeelen I\u2019m curious what you think is a good risk/reward ratio and how do you generally calculate that to help inform your decision to buy options? Appreciate your insights!
— Dianne Francisco (@dfrancisco910) December 30, 2020
2/14
Usually people will use all their knowledge to make guesstimates about an investment like:
- 20% chance to go bust
- 20% chance to break-even
- 40% chance to double
- 10% chance to 4x
- 10% chance to 10x
And then state "for me, this is good from a risk/reward standpoint".
3/14
That last statement will be different for each individual though. For some people the investment laid out above may be great from a risk/reward standpoint, because of the high expected ROI. For others, it may be terrible because of the 20% chance to go bust.
4/14
Investing is much more complex than just making money and maximizing returns, and investment strategies should differ from individual to individual. If this is news to you, I strongly suggest you read through the first section of this blog
5/14
The final section of the same blog post goes into depth on $TSLA call options, and how I go about evaluating them. There is even a subsection called "The Risk Reward of Call Options" that should answer a lot of your questions.