Position Sizing Rules

Position Sizing Is Risk Management

You can have the best strategy in the world and still blow up your account with one oversized position. Position sizing is not an afterthought — it is the single most important decision you make on every trade.

The rules below are not guidelines. They are hard limits. Break them and you are gambling, not trading.

Rule 1: Maximum 2-5% Risk Per Trade

No single trade should put more than 5% of your total account value at risk. For most traders, 2-3% is better.

How to calculate risk:

For credit spreads: Risk = (spread width - credit received) x number of contracts x 100

$5-wide spread, $1.50 credit, 2 contracts: (5 - 1.50) x 2 x 100 = $700 at risk
On a $25,000 account: 700 / 25,000 = 2.8% — acceptable

For cash-secured puts: Risk = (strike price - credit received) x 100

$150 strike put, $3.00 credit: (150 - 3) x 100 = $14,700 at risk
On a $50,000 account: 14,700 / 50,000 = 29.4% — WAY too much for most accounts
Practical approach: Use a stop loss. If you plan to close at a $3,000 loss, your risk is $3,000 = 6%. Still high. Use only on your largest positions.

For strangles/straddles (undefined risk): Risk = buying power reduction, capped by your stop-loss

If your strangle uses $5,000 of buying power and your max loss rule is $2,000, your risk is $2,000
On a $50,000 account: 2,000 / 50,000 = 4% — acceptable

Rule 2: Maximum 15% in Any Single Underlying

No matter how much you love AAPL, never have more than 15% of your account tied up in one stock. This includes all positions — puts, calls, stock, spreads.

Example on a $50,000 account:

You sold a cash-secured put on AAPL ($16,500 collateral) and a covered call ($17,500 in stock).
Total AAPL exposure: $34,000 = 68% of account. This is suicidal concentration.
Maximum AAPL exposure: $7,500.

If you run the wheel on expensive stocks, this rule means you need a larger account or you need to use spreads instead.

Rule 3: Maximum 30% in Any Single Sector

Technology, financials, healthcare, energy, consumer — spread your risk across sectors. If more than 30% of your deployed capital is in one sector, you have a sector bet, not a diversified portfolio.

Quick check: List all your positions by sector. Add up the capital deployed in each sector. If any sector exceeds 30%, close or reduce positions until it is below 30%.

Rule 4: Maximum 50-70% Capital Deployed

Never have all your money at work. Keep 30-50% in cash or cash equivalents. This reserve serves three purposes:

Surviving drawdowns. If your deployed capital drops 20%, your total account only drops 10-14%.
Seizing opportunities. Market crashes create the best trading setups. If all your capital is deployed, you cannot take advantage.
Margin safety. Options brokers require maintenance margin. If your account drops below margin requirements, you face forced liquidation at the worst prices.

Rule 5: Maximum 8-10 Positions

More positions means more complexity, more monitoring, and more opportunities for mistakes. Keep your portfolio at 6-10 positions. Each one gets proper attention and management.

If you have 15 positions and the market drops 3% in a day, can you calmly evaluate and manage all 15? Most traders cannot. They freeze, panic, or make rushed decisions. Fewer positions, better management.

The Position Sizing Calculator

Before every trade, do this math:

Account size: $___
Max risk per trade (2-5%): $___
Trade's maximum loss: $___
Number of contracts that keeps loss within limit: ___ contracts
Capital deployed by this trade: $___
Total capital deployed after this trade: ___% (must be below 70%)
Sector exposure after this trade: ___% (must be below 30%)
Single underlying exposure after this trade: ___% (must be below 15%)

If any number breaks a rule, reduce the trade or skip it entirely.

Sizing by Account Level

$10,000 account: This is the minimum for options income trading. You are limited to 1-2 credit spread positions at a time, or 1 cash-secured put on a cheap stock. Expect slow growth. The goal is survival and learning, not income.

$25,000 account: You can run 4-6 positions. Mix of credit spreads and 1-2 CSPs on stocks under $125. This is where real income trading begins, but diversification is still limited.

$50,000 account: The sweet spot for retail income traders. 6-8 positions across sectors. Full strategy mix available. Meaningful monthly income possible.

$100,000+ account: Full diversification. 8-12 positions. All strategies available including strangles, straddles, and the wheel on expensive stocks.

When to Reduce Size

After a 5% drawdown: Cut all new position sizes by 25%. After a 10% drawdown: Cut all new position sizes by 50%. Close your weakest existing positions. After a 15% drawdown: Stop opening new trades. Focus entirely on managing and closing existing positions. Do not trade again until you have reviewed your process and identified what went wrong.

Scaling down during drawdowns is psychologically difficult because you want to "trade your way back." That impulse is what turns 10% drawdowns into 30% drawdowns. Protect capital first. Rebuild slowly.

The Rule That Overrides Everything

When in doubt, trade smaller. No one ever blew up an account by risking too little. The premium will be there tomorrow. Your capital might not be.