Most position sizing advice for options is borrowed from equities and does not survive contact with a contract that can lose most of its value in minutes. The arithmetic that matters is simple, rarely done, and decides whether a bad week is survivable.
Start with the only number that matters: the percentage of the account a single stopped-out trade removes. That is the fraction of capital deployed, multiplied by the fraction of the position lost when the stop triggers.
Traders consistently underestimate this because they think in terms of the stop percentage alone. A stop that gives back a third of a position sounds survivable. Applied to nearly the whole account, it removes nearly a third of the account, and the compounding of two in a row is far worse than most people expect when they size the first one.
Expectancy is a long-run average and says nothing about the order events arrive in. Survival is decided by sequence. Work out what two and three consecutive losses leave you with, because at any realistic loss rate a run of two inside a month is routine rather than a tail event.
The asymmetry is the part that catches people: a drawdown needs a larger gain to recover than the loss that created it, and the gap widens fast as the drawdown deepens. Halving an account requires doubling it to get back.
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11% |
| 25% | 33% |
| 40% | 67% |
| 50% | 100% |
| 70% | 233% |
A stop is a trigger, not a guarantee. On a thin contract the exit fills below where the stop triggered, so the loss you actually take is larger than the one you configured. Size on what you expect to realise, and the only way to know that is to compare your live exits with your intended ones over a sample of real trades.
On short-dated contracts your own order moves the book. A size that is invisible in a heavily traded strike will walk the price against you in a quiet one, and the damage lands on the exit when you are least able to wait. Cap size against the strike's actual traded volume rather than against your account alone.
Deploying nearly everything on one trade maximises the compounding rate and the ruin probability at the same time. It is not automatically wrong — a system with a genuine edge and a hard stop can justify it — but it must be a decision made with the consecutive-loss arithmetic in front of you, not a default inherited from a backtest that never produced a losing streak.
Whatever you conclude, do the arithmetic yourself. It needs no simulator, it cannot be flattered by a price model, and it is the number that determines whether you are still trading next month.
There is no universal figure, but the decision should be made from the consecutive-loss arithmetic rather than a rule of thumb. Work out what two and three losses in a row leave you with, and whether you could recover from that, before choosing a size.
Because the gain needed is calculated on the reduced balance. A 25 per cent drawdown needs a 33 per cent gain to recover, a 50 per cent drawdown needs 100 per cent, and a 70 per cent drawdown needs 233 per cent. The asymmetry widens sharply as the drawdown deepens.
No. A stop is a trigger. On a thin contract the exit fills below where the stop triggered, so the realised loss is larger than the configured one. Size on what you expect to realise, measured from your own live exits.
Yes. On short-dated contracts your own order moves the book, so a size that is invisible in a heavily traded strike will walk the price against you in a quiet one. Cap size against the strike's traded volume, not only against the account.
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