Market Overview

Size It Right For Survival


In this very challenging market we must always be on top of our game and ready for any opportunity.  The sun will not always be shining on us so we need to have good instincts and survival tactics in place.  After all, we're just trying to make our way and live to fight another day.  There are many good rules to live by for option traders but the most critical is sizing your positions right.

A great trader with a bullet proof system can destroy his/her account without the discipline of proper position sizing.  But what is the right size?  After all, we need to make an impact on our portfolios.  For options trading strategies, I will use strictly 1.5-2% of total capital on a trade.  This is a smaller but manageable size for me as I like to have many positions at work.  If I am wrong on a play of this size it's not going to kill my portfolio, and perhaps others will pick up the slack so I may even override the loss for a positive p/l.

At the end of the day, sizing is a very personal judgment on what type of risk you are comfortable carrying.  Options give us great leverage to gain significant ground on the market with a smaller capital requirement, yet we can lose very quickly.   Some disregard position sizing discipline, and while they may get lucky now and then, they will not be able to sustain the pressure of performing day in and day out.  With option trading, not only do we have to get it right with direction but also with timing.  When the market conditions are not ideal or trending as they are currently then our job is made that much more challenging.  At these times correct position sizing will save your skin, especially if an adverse move hits any of your plays.

A stock trader/investor must also use solid position sizing rules.  Again, we're trying to advance our portfolios but want to stay in the game in case an adverse move occurs.  Diversification is the only free lunch out there and the best way is to balance a stock portfolio with satisfying position sizing.

In the Trifecta Stocks Portfolio for Bryan Ashenberg and I employ a strict discipline of no more than 5% per position, and we will build into it over time.  We have many positions that have us diversified enough to give us a chance to beat the market with stockpicking skill.  All we want is a chance to win with our methodology.  You will also see position sizing discipline displayed by Jim Cramer and Stephanie Link in the portfolio (Jim Cramer's Charitable Trust).

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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