How to Calculate Position Size in Options Trading: A Complete Guide
What Is Position Sizing in Options Trading? When determining the size of your position in options trading , you need to decide how many option contracts to enter taking into account the size of your account, the level of risk you are willing to take, the strategy you are using, and the possible loss from the position. Rather than simply asking yourself, "How much could I make?", a disciplined trader should first ask a more important question: "How much can I afford to lose if this trade fails?" This small shift in thinking can make a big difference to long-term risk management. An options position may appear small since the premium is low, but it can still involve a great deal of exposure because a standard equity option usually corresponds to 100 shares of the underlying security. The Options Industry Council states that the standard contract size for equity options is generally 100 shares, although adjustments to the contract specifications can be made after c...