Position sizing is how many option contracts you trade on any single setup. It's one of the most important decisions you make.
The Risk Rule
Most professional traders risk 1-2% of their account per trade.
If your account is $50,000:
- 1% risk = $500 per trade
- 2% risk = $1,000 per trade
Never risk more than 2% on a single trade. Some traders use 0.5% for extra safety.
How to Calculate Size
- Determine your max loss per contract (defined risk spreads make this easy)
- Divide your risk limit by max loss per contract
- That's your position size
Example:
- Account: $50,000
- Risk limit: $500 (1%)
- Max loss per contract: $500 (if it's a $5 wide spread bought for $5)
- Position size: 1 contract
Scaling In
Professional traders often scale in:
- Trade 1 contract on first setup
- If it works, add 1 more
- Don't add to losing positions
The Compounding Advantage
With proper position sizing, you:
- Survive losing streaks (small losses don't kill you)
- Let winners run (profits compound)
- Sleep at night (positions are manageable)
Common Mistakes
- Trading too big on first try (blows up account)
- Revenge trading larger after losses (guarantees disaster)
- Ignoring risk (hoping the trade works)
Related: Risk Management, Risk Reward Ratio, Max Loss
