Options Trading Risk Management & the Indisputable Math Behind Optimal Position Sizing

One of the key elements of becoming a more successful trader is the ability to absolutely master options trading risk management. And, contrary to what you might assume, it comes down to a couple simple things. Namely, determining and sticking to an optimal position sizing range for each trade and never allocating the full value of your account at one time.

In simple terms; don’t invest too much money in each trade and always have money left over to keep the lights on.

My goal today is simply to help you trade with more confidence. The type of unwavering confidence to go out and start placing trades without the fear of losing or the fear of blowing up your account. For me, confidence comes from understanding the underlying math and reasoning behind optimal position sizes. Too often you’ll hear or see other traders spout off allocation ranges without any clear direction on WHY they chose that range.

If someone told me that I should allocate just 10% of my account towards each trade I’d ask them why? Why this range and not something higher or lower? What’s the reasoning behind 10%? Rarely will you get a straight answer.

The reality is that if you consistently enter high probability trades and stick to the optimal position sizing range we reveal, the odds of completely blowing up your account at any point is 1 in 28 trillion.

In today’s show, I'll walk you through the math behind why I’ve said, for 8 years now, that you should never allocate more than 1-5% of risk per trade. It’s not just some cool numbers I pulled out of thin air. There’s a mathematical and logical approach and I’ll break it all down in today’s latest show.

Key Points from Today's Show:

• The only thing you can really control is the underlying that you trade, which strategy you choose, and how big your position size is — position sizing is the number one key for success.
• Always allocate each position or trade on a sliding scale between 1-5% of your account or equity size — based on cash or equity, not what you can borrow in margin.

• Risk is defined as your maximum loss potential on a credit spread, iron condor, or risk defined trade. When trading undefined risk trades or naked positions, the key is to allocate at least up to the initial margin requirement.
• When trading in a low volatility environment, allocate towards the bottom end of the 1-5% range, and allocate more towards the higher probability setups.
• When trading high probability positions, your risk of blowing up your account is infinitely small if you stay under the 5% threshold per trade, and you trade with a high probability of success.
• Risk management principle: Keep 20-40% of your account in cash, or dry powder, because you do not know for certain what will happen in the market.
• If you're placing high probability trades and keeping your positions diversified, the odds of seeing consecutive losses on the extreme end of the spectrum is incredibly small.