Options position sizing and max loss · Options 101

In this lesson

Size a position from its max loss and a stated risk budget. Identify when the premium paid understates the real risk, and recognize the hidden risks (gaps, correlation, liquidity).

5
short parts: 11
questions: ~15
minutes

Read the whole lesson on one page

Position sizing and max loss: the lesson

Pick the risk first

Before you look at any option, decide how much you're willing to lose on one idea. Use a share of the account, not a hunch.

Step 1: Account: $20,000.
Step 2: Example policy: 1% per idea.
Step 3: Budget: $20,000 × 1% = $200.

Feeling confident isn't a reason to risk more. A run of wrong calls at a big size can do far more damage than the same run at a small one.

From max loss to contracts

Step 1: Find the max loss per contract.
Step 2: Divide the budget by it.
Step 3: Round down.

Idea (budget $200)	Contracts that fit
Long call at 0.90, max loss $90	2
Put debit spread, max loss $120	1
Call credit spread, max loss $380	0

An uncovered short call has no max loss, so you can't size it this way at all.

Premium isn't always the risk

Take the 50/45 put credit spread from Module 7. It pays you $150 up front, but you can lose $350. Size by the $350.

Drag to move the stock price at expiration

Stock at $51.00: profit of $150

Breakeven: 48.50
Max loss: $350
Max gain: $150

Put credit spread: short 50 put at 1.72, long 45 put at 0.22, at expiration. You collect $150 but can lose up to $350.

Stops don't cap an option's loss

A stop-loss order fills at the next available price. If the stock gaps 15% overnight, that can be far past your stop.

A defined-risk spread has its worst case built in.
A stop on an option is not the same as a cap.
Wide bid/ask spreads in thin options make exits cost more.

Positions that lose together

Step 1: Two bullish spreads on two bank stocks, each risking 1%.
Step 2: Both report on the same morning.
Step 3: One sector move can hit both, so treat them as one 2% bet.

Also check dollars against the account. $500 on calls sounds small, but in a $2,000 account it's 25%.

Worked example: A $25,000 account, example policy of 1.5% per trade = $375 budget

Illustrative numbers, not real quotes.

Follow the three steps for a $25,000 account with an example policy of risking 1.5% on one idea.

Step 1. Budget = 1.5% × $25,000 = $375.
Step 2. Find each idea's max loss per contract.
Step 3. Contracts = budget ÷ max loss, rounded down.

Idea	Max loss / contract	Contracts that fit	Total max loss
Long 50 call at 1.72	$172	2	$344
Bull call spread 50/55 at 1.42	$142	2	$284
Put credit spread 50/45 for 1.50	$350	1	$350
Iron condor 85/90/110/115 for 1.50	$350	1	$350

Row 1: 375 ÷ 172 = 2.18, so 2 contracts. Three would risk $516, over budget.
Row 3: 375 ÷ 350 = 1.07, so 1 contract. The credit of $150 is not the risk, the $350 is.
Always round down. Rounding up breaks the rule you set.

Now add correlation. Say the long call and the bull call spread both bet on the same earnings report.

Count them together: $344 + $284 = $628, which is 2.5% of the account.
That is above the 1.5% example policy, even though each trade fits alone.

Education only, not investment advice. Options involve risk. Read the OCC's Characteristics and Risks of Standardized Options. Example numbers are illustrative.