Do you make decisions based on the number of contracts or a specific dollar amount to invest ?

[DallasCowboysFan]

I was just curious as to how many option contracts the average person buys when they make a trade.

Do you normally average 1, 5, 10 contracts......or is it based on the cost of each contract and the level of your confidence in the trade?

Or, instead of limiting yourself to X number of contracts do you restrict yourself to how much you spend on a decision? In other words, instead of saying that "I will buy 5 contracts at $2500', do you restrict yourself to risking $2500 ( or $1,000 or 5,000 ) on any investment, regardless of the number of contracts?

Is it the number of contracts or the dollar figure ?

 

[Apophenia]

Uh ... By buying X or Y contracts you get such and such exposure to the variations of an underlying.

Numbers of contract to buy is IMHO determined given the equation :

Risk = #Tick x Tick Value x Contract
You isolate contract to find it.

%Risk has to be kept under a specific threshold which is defined by the kelly criterion (For exemple) otherwise you'll certainly blow up.

You can scale up and down but keep an eye on your risk for keeping it below your criterion (threshold).

Exemple :
Let's say your P(Gain) is 0.5
Your average Reward to Risk is 3
Kelly tells you to bet 25% MAX of your bankroll.

Now you see a setup on ES with a SL @ 5 Pts away from entry
ES is 50$ per point. So it's 250 Risk. Your capital must be MIN 1K.
If you got 10K then you can entry with 10 contracts to keep risk @ 25%.

 

[lawrence-lugar]

For me, it's dollar figure. -- a general, round, whole number

 

[Deuteronomy_24_7]

Yes, $ amount of premium is a good back-of-the-envelope measure of the risk of the trade.

 

[DallasCowboysFan]

Risk = #Tick x Tick Value x Contract
You isolate contract to find it.
%Risk has to be kept under a specific threshold which is defined by the kelly criterion (For exemple) otherwise you'll certainly blow up.
Kelly tells you to bet 25% MAX of your bankroll.

Thanks, I know there is a formula to determine risk but I have never used it.
I was just wondering how often people use all the minute details available to make a decision instead of using a basic rule like a max of 10 contracts, 10 percent of your cash or a fixed dollar amount to risk on any trade.

I appreciate your reply though....I am still learning....there is lots to learn...

 

[DallasCowboysFan]

Yes, $ amount of premium is a good back-of-the-envelope measure of the risk of the trade.

Thanks, I think that is how most traders do it....either a percentage (10% etc) of their total cash to risk or a specific dollar amount.

How did you choose your user name........
Just wondering......

Deuteronomy 24:7King James Version (KJV)
7 If a man be found stealing any of his brethren of the children of Israel, and maketh merchandise of him, or selleth him; then that thief shall die; and thou shalt put evil away from among you.

 

[Handle123]

I was just curious as to how many option contracts the average person buys when they make a trade.

Do you normally average 1, 5, 10 contracts......or is it based on the cost of each contract and the level of your confidence in the trade?

Or, instead of limiting yourself to X number of contracts do you restrict yourself to how much you spend on a decision? In other words, instead of saying that "I will buy 5 contracts at $2500', do you restrict yourself to risking $2500 ( or $1,000 or 5,000 ) on any investment, regardless of the number of contracts?

Is it the number of contracts or the dollar figure ?

Are you doing options instead of buying/selling the underlying? Or are you hedging? I use a formula for hedging but for like Credit Spreads or Debit spreads it be how many I would normally do on underlying.

 

[newwurldmn]

Notional value. Then I am by definition always running less risk than the underlying.

 

[DallasCowboysFan]

Are you doing options instead of buying/selling the underlying? Or are you hedging? I use a formula for hedging but for like Credit Spreads or Debit spreads it be how many I would normally do on underlying.

Just a basic option......no covered calls.

 

[Handle123]

Unless it is a spread, I don't buy them outright. That not to say they stay spreads for any length of time though. Biggest risk for me in first 3 bars.