How Much to Risk: Position Sizing and the Bad Month

Beginners obsess over which trade to take. Professionals obsess over how big. The difference between a hobby and a blowup isn't the strategy — it's sizing. Every management rule on this site (take profits at 50%, roll or walk away, exit at 21 days) manages trades. This guide manages the account — and it's the one that keeps you in the game.

The only question that matters

Before any trade, ask one question and answer it in dollars: how much do I lose if I'm completely wrong?

Not "what's the premium." Not "what's the probability." How much leaves my account on my worst day. If you can't answer that number before you enter, you're not trading — you're hoping. Every idea card on this site shows you the pieces (max risk, budget, breakeven); this guide tells you what to do with them.

Capped losses vs open-ended losses

Trades come in two species, and they size differently:

• Capped loss (defined risk): put spreads, iron condors. The worst case is printed on the ticket — a $5-wide put spread sold for $1.50 can never lose more than $3.50 per share, $350 per contract. You can size these precisely, because the ceiling is real.
• Open-ended loss: naked puts, strangles, and the stock leg of covered calls. A short put's loss does have a mathematical ceiling (strike × 100 minus the premium — the stock can't fall below zero), but 25% down on a $95 strike is still a $2,375-per-contract kind of pain, and short calls genuinely have no ceiling at all. There's no printed worst case you can plan around — so you size by the stress case: what does this lose if the underlying drops 25%?

Trades with open-ended losses aren't forbidden — most of our income comes from them — but they earn smaller size. The less defined the worst case, the less of your account it gets.

A sizing rule you can actually follow

Forget complex formulas. Three rules, all in plain numbers:

• One trade risks no more than 2–5% of the account in its stress case. On a $50,000 account, that's $1,000–$2,500 of worst-case pain per position. A $350-max-loss spread is one trade. A naked put needs its stress case measured first.
• All trades combined use no more than 50% of buying power. The other half is your shock absorber — it's what lets you survive the month below without a margin call and without panic-selling.
• New strategy, half size. The first few trades in any strategy you haven't run are tuition. Pay tuition cheaply.

These aren't our rules because a textbook said so — they're what keep a premium seller alive through the years when the market reminds everyone who's boss.

The bad month, worked through honestly

Let's do the scary math, because someone should. You have a $50,000 account, fully within the rules: ten short puts across quality stocks, each stress-sized, 40% of buying power in use. Then the market drops 25% in a month — the kind of thing that happens every several years.

Several puts go deep in the money. The ones you can't roll become stock you own at strikes 25% above the market — on paper, down roughly $10,000–$15,000 across the book. It feels catastrophic. Here's what the rules do: the positions you can roll, you roll — pushing strikes down and expirations out, collecting more premium each time. The shares you're assigned are quality companies you'd own anyway (that's an entry requirement, not a hope). You take no new risk until the dust settles. And because you kept half your buying power free, no margin call forces your hand at the bottom.

Recovery then comes from two directions: the market healing, and the enormous premiums available after a crash — volatility spikes, and the insurance company charges crisis prices. Sellers who survive the drop often make their best money in the months after it. The bad month doesn't kill premium sellers. Being oversized when it arrives does.

Why the 50% rule and rolling don't save bad sizing

Taking profits at half the premium is a great trade rule. Rolling a pressured put is a great trade rule. Neither one fixes an account that's risking 30% on a single underlying or running at 95% of buying power. Management rules harvest winners and contain losers one trade at a time; sizing is what makes the losers survivable all at once. Do the sizing first. The trade rules only work on top of it.

The short version

• Before every trade, know your worst-case loss in dollars. Can't answer it? Don't enter.
• Capped-loss trades (spreads) size precisely. Open-ended trades (naked puts, strangles) size by the stress case — and get less.
• Risk 2–5% per trade, keep total buying power use under 50%, run new strategies at half size.
• The bad month will come. Survivors aren't the ones who predicted it — they're the ones who were sized to live through it.
• Trade rules manage trades. Sizing manages the account. Do sizing first.