# Position sizing and max loss (Options 101, lesson 8 of 10)

Canonical URL: https://mrkts.gg/learn/options/sizing
Last updated: Nov 9, 2026, 9:00 AM ET

> Size an options trade from its max loss and a risk budget, and see why premium, margin and real risk aren't the same. Example policies only.

What you'll be able to do: 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).

## 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.

1. Account: $20,000.
2. Example policy: 1% per idea.
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.

> **Tip:** 1% is an example policy to practice with, not a recommendation.

## From max loss to contracts

1. Find the max loss per contract.
2. Divide the budget by it.
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.

> **Key idea:** If the answer is zero, the trade doesn't fit your rule. Skip it or pick something with less risk.

## 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.

*Payoff chart at expiration: short 50 put at 1.72, long 45 put at 0.22. Per position: breakeven 48.50, max gain $150, max loss $350.* 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.

> **Watch out:** Size by max loss, not by the premium you receive or the margin your broker asks for.

## 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

1. Two bullish spreads on two bank stocks, each risking 1%.
2. Both report on the same morning.
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.

## Practice

The page has 6 practice questions and 5 mastery checks for this lesson, with feedback on each wrong answer: https://mrkts.gg/learn/options/sizing

Next lesson: [Exercise, assignment, early exercise, pin risk](https://mrkts.gg/learn/options/assignment.md)

Education only, not investment advice. Example numbers are illustrative, not real quotes.

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