Options 07 · Options
Position Sizing for Options
Where the risk rules from Module Two change shape
Module Two taught you to risk a fixed small percentage of the account per trade, with the stop distance deciding the size. Options break that arithmetic, because the thing you are risking is not the distance to a stop — it is the whole premium.
That makes the sizing arithmetic simpler than for shares, not harder. Account size × risk percentage = the total premium you are allowed to spend on the position. Divide by the cost per contract, round down, and that is your contract count.
Take your account size
The real number, not the number you intend it to be.
Apply your risk percentage
The same conviction tiers from Module Two apply here — and this is the instrument where staying at the bottom of the range matters most.
That figure is your total premium budget
Not your margin, not your notional exposure. The cash you are prepared to see go to zero.
Divide by the contract cost
Remembering the ×100. A $1.15 contract costs $115.
Round down, always
One contract fewer is always the correct rounding direction on an instrument that expires.
Calculator
Options position size
How many contracts your risk rule actually allows. Two ways to size — pick the one that matches how you plan to exit.
If the contract doesn't fit — size it in shares instead
When the contract costs more than you can risk
Run the numbers honestly and this will happen regularly, especially on a smaller account or an expensive stock. The contract that actually fits the thesis costs $400 and your risk allowance is $250. The calculator returns zero, and it is right.
There is a wrong answer here and almost everyone reaches for it: buy a cheaper contract. Move the strike further out, shorten the expiration, and the price comes down to something affordable. What you have actually done is take a position with worse odds, less time and a higher chance of total loss, purely because the number on the ticket got smaller. The trade did not become cheaper. It became worse.
Shares as the vehicle
Buying the stock outright is the plainest alternative and it removes the two things that make options hard. There is no deadline, so being early costs you nothing but patience, and there is no decay, so a flat week is genuinely neutral rather than a slow loss. Volatility expectations can do whatever they like and your position does not care.
The sizing goes back to the arithmetic from Module Two: risk allowance divided by the distance from entry to your stop gives the share count. Because the stop is a real level rather than the whole position, the same $250 of risk supports a far larger position than it does in premium — and one you can hold as long as the thesis holds.
What shares give you
- No expiration — the thesis can take as long as it takes
- No theta, so sideways is neutral rather than costly
- No volatility risk on the position itself
- A stop that is a level, not the whole stake
- Tight spreads on any liquid name
What you give up
- Leverage — the same dollar move is a much smaller percentage return
- Defined maximum loss, unless the stop actually gets filled
- Far more capital tied up per position
- Gap risk straight through your stop overnight
Why ADR decides whether shares work
This is the part people skip, and it is what separates a shares trade that works from one that dies of boredom. Average daily range is how far a stock typically travels between its high and low in a session, expressed as a percentage. It tells you whether your target is reachable in the time you are prepared to wait.
A stock with a 1% ADR that needs to travel 6% to reach your target requires something like six clean sessions in one direction, which almost never happens. The same 6% on a 5% ADR name is a day or two of ordinary movement. Identical thesis, identical target — but one of them is a trade and the other is a wish.
This is also why the Power Earnings Gap screen in Finding Candidates filters for a minimum ADR. A stock has to be capable of moving enough to pay for the risk, and one that ranges half a percent a day cannot pay for a stop placed two percent away no matter how good the setup looks.
Leveraged vehicles, and the honest warning
Between plain shares and options sit two ways of getting more exposure per dollar. Both are legitimate and both are more dangerous than they look.
Margin
Borrowing from the broker to hold more shares than your cash supports. The position behaves exactly like shares — no decay, no expiration — but losses are amplified identically to gains, you pay interest, and a large enough move triggers a margin call that closes the position at the worst possible moment rather than at your stop.
Leveraged ETFs
Funds that target two or three times the daily move of an index or sector. They deliver that multiple over a single session, not over weeks — the fund rebalances daily, so in a choppy sideways market a 3x fund can lose value while the index it tracks finishes flat. Short-horizon vehicles, structurally.
Choosing between them
Start with what the thesis needs
A specific move by a specific date favours options. A directional view with no deadline favours shares.
Check the contract against your risk allowance
If a good contract fits, take it. If only a bad contract fits, the answer is not the bad contract.
Check the stock's ADR against your target
If the move is more than about five average sessions away, shares will test your patience harder than your analysis.
Size on the stop, not on the ticket
Shares and margin size on stop distance. Options size on premium. Leveraged funds size on effective exposure.
When nothing fits, take no position
The most underrated outcome on this page. An account too small for a trade done properly is not an argument for doing it improperly.
The leverage trap
One contract controls 100 shares. Five contracts on a $100 stock is $50,000 of notional exposure that might have cost you $575. The premium feels small, and the exposure is anything but.
This is what makes options feel cheap and behave expensive. A position that would be obviously oversized in shares looks modest as a premium figure, and traders who would never buy $50,000 of a stock will buy the option equivalent without pausing — because the number on the ticket was $575.
Why the percentage should be lower here
- Total loss is a normal outcome for a bought option, not a tail event. Sizing that assumes partial losses is sizing for the wrong distribution.
- There is no 'wait it out'. Shares let you be wrong about timing and right eventually; options have a deadline that settles the question for you.
- Losses cluster. A quiet fortnight can take several positions to zero at once through theta alone, with no dramatic move anywhere.
- Spreads and slippage cost more proportionally than they do in liquid shares.
Run the equity-curve widget in Module Two with a lower win rate and a −1R average loss that actually means −1R every time, and the shape of the drawdown answers the question of how much per trade better than any rule of thumb here would.