> At a minimum, know exactly what the worst case scenario is with each trade. Make sure this isn't more than you can lose.
This. Actually, it's not just the minimum - it is the best way, and possibly only way, in many cases.
Many traders/investors went bankrupt by assuming some statistical model of how things behave, and using this data, assumed that e.g. with 99.999% confidence, one trade's profit will be able to cover another trade's loss if things go bad. However, when things go bad, they tend to do so in ways that do not match historical patterns, and thus these models are invalid.
Also, if you are short call, long put, long underlying (in the right proportion) then theoretically you cannot lose. However, the options and underlying are likely to trade in different markets (with different rules, different margin requirements, and lacking a netting agreement), and as a result, extreme market movements may make your "perfectly hedged position" a huge loss because e.g. your underlying gets liquidated due to a margin call at the bottom of a flash crash, but your synthetic future remains; and now you're exposed.
This. Actually, it's not just the minimum - it is the best way, and possibly only way, in many cases.
Many traders/investors went bankrupt by assuming some statistical model of how things behave, and using this data, assumed that e.g. with 99.999% confidence, one trade's profit will be able to cover another trade's loss if things go bad. However, when things go bad, they tend to do so in ways that do not match historical patterns, and thus these models are invalid.
Also, if you are short call, long put, long underlying (in the right proportion) then theoretically you cannot lose. However, the options and underlying are likely to trade in different markets (with different rules, different margin requirements, and lacking a netting agreement), and as a result, extreme market movements may make your "perfectly hedged position" a huge loss because e.g. your underlying gets liquidated due to a margin call at the bottom of a flash crash, but your synthetic future remains; and now you're exposed.