One of the most common questions options traders have is “how big should I size my positions?”

And that’s a good thing because position sizing is critical to your options trading results.

Get it wrong, and be ready to see your account head to $0. Get it right, and you’ll be on the road to long-term success.

So I wanted to give Power Plays Options subscribers a primer on how I think about sizing.

The #1 Question I Ask Myself

I use options because they offer high upside potential with fixed downside risk.

Note: some options strategies like shorting naked calls carry theoretically unlimited downside risk, but  Power Plays Options does not use those strategies.  

When I put an options trade on, I ask myself “what am I willing to lose?”

Yes, I want to make money.

But focusing on what I can lose stops me from getting carried away when I have a strong opinion on a stock or ETF.

For example, in early June, I was very bullish on IWM, and we had a nice trade on IWM calls.

But even though I liked IWM, I wasn’t willing to risk $100,000 on an options position.

Because sometimes, no matter how hard we work and prepare, things don’t go our way.

How I Size Options Positions

Generally speaking, I’m willing to risk 2-3% of my options account on an individual idea.

So on a $100,000 account, I’d put $2,000 to $3,000 into each trade.

 This way, if I take a few losses in a row, my overall account won’t be depleted.

If I was risking 10% of my account per trade and had 3-4 straight losses, that would deplete 2 things:

1. Account Capital: When you lose 30%, you have to gain 43% to get to breakeven. And if you lose 50%, you have to double your account to get back to where you were.

2. Psychological Capital: Major drawdowns hurt your confidence and ability to make good decisions. You may be tempted to revenge trade, which would probably cost you even more money.

At the same time, I’m looking to gain over 100%+ on each options trade.

So as long as I maintain a decent batting average, my P&L has the potential to move up nicely.

Position Sizing for New Traders

If you’re new to Power Plays Options, I want you to start small - even if you’re an experienced pro with a $1 million+ account.

I said above that I’m willing to risk 2-3% of my options account on an individual idea. 

But I may go even smaller if I’m trying out a new strategy, or working with a stock I don’t know particularly well.

It’s okay to buy just one option contract while you get your feet wet.

Buying multiple contracts gives you more flexibility for taking partial profits. 

But if you take a long-term view of your trading (which I hope you do), it’s better to start small and gradually take more risk as you feel comfortable.

Starting small also helps you figure out your psychological limits.

If risking 3% on a trade keeps you up at night, then you know it’s too much for you.

And if you risk so little that you don’t even care about a trade, then you’re going too small.

It might take you a little time to figure out the right balance for you.

When Winning Is a Bad Thing

Sometimes, the worst thing that can happen to a trader is making too much money too fast.

Yes, it sounds counterintuitive.

But imagine you have a $50,000 account. You put it all into one trade and double your money.

You’ll be happy in the moment.

But you’ll also have a warped sense of how risk and reward work - and you’d probably blow out your account from taking too much risk on your next few trades.

It’s okay to shoot for big rewards. 

But remember that you can’t get those rewards without taking a certain level of risk.

So to wrap this up:

1. Always Know What You’re Willing to Lose
2. Start With Small Positions, Even If They Feel Too Small
3. Build Your Risk Tolerance Slowly

I hope this helps! 

-Scott