Options Optimal Position Size
Select the risk you like
Option Position Size is important in the risk you take with trading. Especially when you sell options for premium. Depending on your capital in your portfolio your trading style could be different. With much capital you can afford to take on more risk. With a small capital on the other end you want to be very cautious with your trades. You desire to make profits continuously. So you want to enter trades with a consistent risk and enough reward.
You may do this by selling out of the money options so that you receive option premium. You may sell options which have enough premium and have a delta of 16. This means that this option has only 16% chance that it is in the money by the time it expires. So, if you sold it you have 84% chance to keep the credit.
Every traders experience losses. Sometimes they will experience several losses at one time. Did you trade small enough to survive of did it blew you out of the game? You need to be consistent in the risk you take on. Every risk start with entering or set up of a trade.
Not everyone is going to have the same amount of money to start with. The amount of money you have is the size of your trading capital. This will determine the position size that you are able to trade with. An optimal position size reduces risk.
How to choose Proper Position Size
The position size is essentially the amount of money you put into the market – in other words the amount of risk that you take with the trade. The larger the position size, the more money you will make if the trade wins. However, this also means you can lose more money. This is why using the correct position size is so important, because you can keep within the correct limits of money management and protect your capital from losing trades.
A professional trader never risk more than 5% of his trading account on any single trade. Starters may start with 3% risk. This is why your trading capital will determine how much money you allocate to a trade.
For example if your trading capital is $10.000 then your risk per trade should not be more than $500. In this way you can suffer 10 losses at once and still in the game. If a spread (option position) cost you $100 you can take 5 spreads on.
Of course we learn you to setup trade in such a way that you have as less as possible losses. We want you to setup trades with a probability of 60% or more.
And by managing your winners you will bring up you win rate very much.