Position Sizing For Options

qlai said:
The popular stocks ARE the market. So might as well trade the index.
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That's not really true, if you dig deeper. Let's say top 50 stocks in SPX are correlated by around 40%, which means there will be a fair number of times when the stock and the market will go in the opposite direction.

PS. If you really feel like you have good call on single names, you can trade conditional spreads on pairs of names. That adds another dimension to the kinds of views you can express
 
qlai said:
I'm not familiar with the term. Can you give a generic example please?
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The idea is to find pairs where you have a view on relative performance of the two assets in the pair that's conditional on the direction of the whole basket.

Let's say you think if there is going to a recession, stock A (which provides essential services) will fall less then the stock B (which does not). The conditional spread is to sell a put on the stock A and use the premium to buy a put on the stock B, holding the position to expiry (with whatever stop losses etc). The ideal setup would be when stock A would have higher divs, borrow and implied vol relative to the stock B - your breakeven on the spread is the difference between the two premiums.
 
qlai said:
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.
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Yes. Excellent point qlai, Kelly is easy to talk about but difficult in practice. However it does provide a good framework for us to look at bet size.

During one stretch in 2017, my Kelly was > .2 and I actually bet 5-10%! Then everything came crushing down in Feb-Apr of 2018. :vomit: :banghead: Sometimes it is easy to get carry away so the other poster's 1-2% makes sense for most of us most of the time.

Take care.
 
andylethal said:
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!
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If you have back test results from your strategy study, you can start with those. Otherwise, use cdvs16's approach to start.
 
Another suspicion I have about f is scalability. You need to know that racking up size will not affect the strategy. With options, it's always a concern imho. Why not simply trade your pnl chart(reduce size on pullbacks, increase on break outs)? We are not trying to win trading competition where you are either #1 or nobody cares.
 
andylethal said:
I'd like to get an idea of how you guys tend to position size long options trades.
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I like to use just ITM options as a stock replacement. If I want to own 2000 deltas of AAPL, and don't have $312K or do not want to tie up that much margin or want an implied stop by using options vs stop orders to limit losses, I'd use a just IMO option. My time frame needs to match the time to expiration I choose. For a day trade, I'd likely go out a week or 2. For a trade that will last days or weeks, an expiration that extends more than a week past my expectations.

An example from Friday's close would be to buy the Feb 1 2019 150 calls (about 5.05). With a .73 D, 27 calls give me about 1971D. My outlay and risk is only $13.635.
 
andylethal said:
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!
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It is easier with options position sizing. So, if you have for example, $10,000 to trade with, you risk 2% per trade. For newer traders, they suggest 1.5%. So, that is $200 at 2% or $150 at 1.5%. So, if you are trading the QQQ by example and the option you are buying cost $1.00 or $100 per contract, you can only buy 2 contracts for that trade. So, you are risking for that trade only 2% of your capital on a worst case scenario. Of course, if you have lost say $100 of the $200, you can always close your options trade and save the $100 for your next options trade. You only lost $100.
 
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