Lesson Overview

Trade Size & Capital Allocation

We're big believers at Option Alpha in controlling our trade size and capital allocation. We know that options trading is just a game of numbers and probabilities and, therefore, the only way we lose long-term is if we deliberately put ourselves in a position to lose a lot of money quickly by trading individual positions that are too big.

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  • Just me!

    Loved it!!

  • Davinder Chopra

    Great explanation with facts & logic. Really appreciate it. Thanks Kirk.

  • David R Allen

    is the buying power effect the same as the margin requirement

  • Truly essential video! Thank you, Kirk. As far as not forcing trades goes, I still want to treat this like a business and am actively looking for trades each day. Sometimes earnings season helps me out, as it is engaging to make earnings trades (if nothing else.)

    • Great! Yes I’m always on the “hunt” for new trades as well.

  • Kyle Nelson

    Does anybody know how to put the ITM probability on their trade tab for TOS?

    • Just click on one of the columns and then go to Customize.

      • Kyle Nelson

        Ok thanks. Sorry for the simple questions, but I love the format you teach with as it makes looking at the numbers that much easier.

  • Protects you from one single trade blowing up your account. We did a popular podcast on this topic here: https://optionalpha.com/options-trading-risk-management-19292.html

  • It wouldn’t because you should be trading different products. For example, an account full of Gold, Oil, Financial, Healthcare, etc (ETFs or single stocks) is more diversified and even if the entire market dropped by 10-15% not everything you’re trading will follow the market exactly. Some may go higher or lower, or not move at all. Does this mean you won’t see a drawdown in your account – no, but you won’t blow up your account.

    • Riley

      Do you try to have a certain amount of your account invested in each sector to keep that diversification? What would be a simple rule of thump to go off of?
      Thanks for all the replies, been super helpful. The website is amazing.

      • I mean as much diversification as possible but I’m not going to force trades for the sake of trading.

  • Yep agree – you have to diversify your strategies and we’ve talked about that before as well.

  • Good question, because at the higher probability levels the premium you receive is much smaller AND the liquidity is much worse.

  • John Brewer

    Great info Kirk! I almost “blew up” my account but this gives my clear actionable criteria to use going forward.

  • Good question! You’ll want to keep the 5% max allocation to one ticker symbol at a time.

  • No not including stock assignment since if you’re ever assigned you can just reverse the stock same day.

    • Eric Hansen

      got it, thx!

  • Wonderful thanks for letting me know!

  • magne gronnevik

    Very clean understandable.

  • Renfrew Wu

    Hi Kirk,

    I understand the probability side of your analysis that you picked mostly 70% probability. My question is that the max profit and max loss % in those trades are proportional to that 70% probability too. What I see is that, for example, in a typical 70% probability position, most of the times the numbers show something like this -> you can max profit $300 but at the same time you have a max loss of $700. Then let’s say you do 10 trades. You win 7 out of the 10 times (70% probability chance). Assuming both winners and losers are the max profit and max loss level. This means 3 out of the 10 times (you will lose 3 x $700 = $2100) and you win 7 out of 10 times (7 x $300 = $2100) too. So how is this going to give us the edge? Yes probability gives us more win rate but you don’t profit as much in each win. But when you lose, each time the $ amount seems to be more. Shouldn’t that neutralize?

  • Sheriff

    I have an account with only a couple thousand. Isn’t it difficult to allocate only 1-3% to a trade and make enough to build the account?

  • As many good trades as possible – don’t force them to hit a certain number.

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