Position Sizing for Options

Determine how many contracts to trade relative to account size and risk tolerance.

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Why Position Sizing Matters

Proper sizing prevents catastrophic drawdowns and smooths equity curve volatility.

Step-by-Step Method

1. Define Account Risk % (e.g., 1%).
2. Find Per-Contract Max Loss (premium paid for long options or assignment risk for short puts).
3. Contracts = (Account Size × Risk %) ÷ Max Loss.

Example: $25,000 account, 1% risk = $250. Buying calls at $2.50 premium (×100) = $250 risk → 1 contract.

Delta-Adjusted Exposure

Multiply contracts × delta × 100 to approximate share equivalence; helps maintain consistent directional exposure.