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December 18, 2012

Position Sizing


One of the key elements when it comes to investing is risk management. Investors that can successfully manage risk will make money in the long run. But many investors focus on how much money they want to make instead of properly managing their risk. I'd like to share one way to figure out how to manage risk and determine how much risk should an investor take.

Portfolio size: $50,000 
Risk per trade: 2% of overall portfolio: 50,000/.02 ($1,000)

That said, if your position is down $1000, you need to exit the trade and review your decision entering the trade, timing of entry, etc.

So, if you're putting on an Iron Condor trade, and if your stop out point is -$1000 and that's 20% of your risk, your risk total shouldn’t be more than $5,000

That means if the distance between your sold option and bought option is 10, ex: 450/460 calls or 320/310 puts you shouldn’t do more than 5 contracts. That's how you determine how many contract to trade.
The number of contacts will control your risk. Of course there are ways to manage losing positions to minimize loses but more importantly make adjustments on time. We provide live trade alerts and live adjustments to our premium Weeklys4Income members.