What is the optimal portfolio allocation (%) to naked options?

[Aged Learner]

To sell naked options you need a strong balance sheet, relative to your exposure, so as not to be forced to close it at the worst possible moment. Therefore, it should be a very low percentage of your account for all your naked options trades added together.

The exact figure is up to your risk management psychology, but I would guess the maximum would be 10% and I would recommend much less, in between 1-5%.

 

[tonyf]

To sell naked options you need a strong balance sheet, relative to your exposure, so as not to be forced to close it at the worst possible moment. Therefore, it should be a very low percentage of your account for all your naked options trades added together.

The exact figure is up to your risk management psychology, but I would guess the maximum would be 10% and I would recommend much less, in between 1-5%.

Thank you. How do you calculate the percentage?

 

[Aged Learner]

Thank you. How do you calculate the percentage?

The cash outlay you need if you are assigned divided by your total cash available. For example, let's say you are selling two puts, one for stock ABC and another for stock XYZ, and you need to pony up 10000$ each if you are assigned. Total is 20000$.

If that is the case, your account should have at least 200000$ available in cash, better if it is two million. That way you avoid receiving a margin call and having to close the position at the worst possible time. You expect to be profitable in the long run and this is the way to survive in the meantime.

The exact figure depends on your own psychology and confidence in your edge, but overall the last thing you need if you are selling naked put options is leverage.