Position Sizing For Options

[andylethal]

Hey everyone,
New to Elite Trader and seeing a lot of great content on here, much appreciated! I'd like to get an idea of how you guys tend to position size long options trades. I primarily trade single-leg positions and am really going back and forth with position sizing. For instance, a long put is a defined risk trade where you can only lose the premium paid. What about fixed fractional though, as a percentage of your account? Anybody base size on a SL?

Thanks in advance!

 

[ironchef]

Welcome to ET. We newbies can learn a lot from the pros here.

I suggest you read up on Kelly Criterion regarding "bet size". In a nutshell, you find your win expectancy and size your investment based on that. It also forces you to recognize that with a losing strategy (if your expectancy is negative), trade long enough and you will be out of business.

Normally we trade fractional Kelly (say 1/4 to 1/2) to ensure the risk of ruin is low.

Best regards,

 

[qlai]

Normally we trade fractional Kelly (say 1/4 to 1/2) to ensure the risk of ruin is low.

Don't you need to know your expectancy very well to use Kelly? That's where people get into trouble with it ... they think they got an edge and oversize. This is a question, not a statement. Very good question, OP. Welcome.

 

[andylethal]

Welcome to ET. We newbies can learn a lot from the pros here.

I suggest you read up on Kelly Criterion regarding "bet size". In a nutshell, you find your win expectancy and size your investment based on that. It also forces you to recognize that with a losing strategy (if your expectancy is negative), trade long enough and you will be out of business.

Normally we trade fractional Kelly (say 1/4 to 1/2) to ensure the risk of ruin is low.

Best regards,

Thanks for the input! I am familiar with Kelly Criterion, and it will definitely help once you have a large enough sample size to base expectancy on. Of course, that's fine for someone who's put on hundreds of trades ( or whatever the statistically substantial number is), but for those who haven't put up that number of trades, it can be a little more complicated to nail down. Which I guess brings us back to what to do in the mean time!

 

[cvds16]

A classic rule says: don't risk more than 2% on each trade ... seems good advise to follow if you trade agressively. Some people risk only 0.5% on each trade. You want to be able to survive in the long run. Beware options can get tricky: make sure you are familiar with the greeks and with that can go wrond: like dividends and important news coming out (this last think might lead to a vol collapse after the fact). Read more than three serious option books before putting your feet into the water.

 

[andylethal]

A classic rule says: don't risk more than 2% on each trade ... seems good advise to follow if you trade agressively. Some people risk only 0.5% on each trade. You want to be able to survive in the long run. Beware options can get tricky: make sure you are familiar with the greeks and with that can go wrond: like dividends and important news coming out (this last think might lead to a vol collapse after the fact). Read more than three serious option books before putting your feet into the water.

Thanks! I actually have been only putting up 1% and trying to be a little more conservative, at least in the beginning. That's where my question comes in. Go the route of taking 1% of the account and dividing that by the # of contracts, or using a SL and backing in to the number of contracts (keeping in mind slippage, etc.)...

 

[tommcginnis]

Here we go again: mouthing platitudes about how much risk per trade, while not specifying that the trades need to be uncorrelated. (E.G., an AAPL put spread for Feb1 is 90% correlated with an AAPL put spread for Feb8 -- "Hello!" )

 

[qlai]

Which I guess brings us back to what to do in the mean time!

I'm not an options trader, so feel free to ignore, but for long options, position size assuming 100% loss. Adjust as you gain experience.

 

[andylethal]

Appreciate it, thank you!

 

[Option_Attack]

I only trade long options. I think we have a huge advantage over long stock and short option traders. We know exactly how much we can lose (with no stop losses!) and it doesn't have to be very much or use much capital, assuming sane trade size. Most (all?) here will strongly disagree. Doesn't bother me at all. Takes both sides to make a market...

I typically get derailed when life happens, but what I try to do is get a few good positive trades done at the beginning of the year to make sure my systems are hitting. Then as the profit grows use a larger and larger percent of profit only. You can do whatever you want with it until the end of the year! This does assume your main source of income is NOT trading, of course. Heck, with long ops you can easily swing for the fences (or YOLO in ET-speak) if you are using profit only. But, I usually only hold trades a few days. I do not let 'em expire completely dead. I try to get at least something when I close the trade, win or lose.