Position sizing
The fastest way to fail at options is not picking wrong — it is betting too big. Position sizing is the discipline of deciding how much capital and risk to commit to any single trade. It is the part of trading that most separates those who last from those who blow up.
Size by risk, not by premium
Beginners size by what a trade costs; professionals size by what it can lose. Those are very different for options. A single short put looks cheap — you collect premium — but its risk is (strike − premium) × 100, potentially thousands of dollars. Always size a position against its maximum loss (or a realistic worst case for undefined-risk trades), never against the premium or the margin requirement alone.
The percent-risk rule
A common, durable rule is to risk no more than a small fixed percentage of your account — often 1% to 2% — on any single trade. If your account is $50,000 and your cap is 2%, your maximum loss on one position is $1,000. For a defined-risk trade like a spread, that directly sets how many contracts you can trade; for an undefined-risk trade, it sets a hard mental stop and a much smaller size.
Your account is $50,000; you risk 2% = $1,000 per trade. You want to sell a $5-wide bull put spread for a $1.50 credit, so each spread risks $5.00 − $1.50 = $3.50 × 100 = $350 of maximum loss. $1,000 ÷ $350 = 2.8, so you trade 2 spreads, risking $700 — comfortably under your cap. Notice what you did not do: you didn’t ask “how many can I afford to open,” which might be ten. You asked “how many keep my worst case under $1,000.”
Undefined risk demands smaller size
Naked short options and short straddles have no capped loss, so the percent-risk rule can’t map cleanly to contracts. Two responses: trade them much smaller than defined-risk positions, and set a mental stop (for example, close if the loss reaches two or three times the credit collected). Undefined-risk trades in large size are the classic cause of account-ending losses — a string of small wins erased by one unsized disaster.
Diversify the risk, not just the tickers
Sizing also means not stacking correlated bets. Five short-put positions on five tech stocks is not five trades — in a market drop it behaves like one big trade. Watch your total portfolio risk and net delta, not just each position in isolation.
Common pitfalls
Sizing to margin instead of to loss. Just because the broker lets you open twenty contracts doesn’t mean your account can survive twenty going wrong.
Upsizing after wins. A hot streak tempts bigger bets right before the mean reverts. Keep size rules constant regardless of recent results.
What to do with this
Before every trade, compute the maximum loss, cap it at a small percentage of your account, and let that decide the number of contracts — not your conviction or the premium on offer. With size under control, the remaining question is whether the trade is even worth taking: probability and expected value.
Sizing controls how much you risk. Probability and expected value tell you whether the trade is worth risking anything at all.
Next lesson · continue the courseOn to probability & expected value →