Position Size and Risk Management

New traders often ask how they can manage risk by structuring their trades based on a certain percentage of their account balance. JTNC suggests traders should aim to risk between 2.5% to 5% of their account balance per trade. That said, smaller traders may need to increase this to 10% of their account balance. If you are a small trader with an account size of $2000 or less, and are subscribed to either JTNC service, JTNC recommends you take only one trade at a time and keep your total risk to no more than 10% of your account balance. With proper scaling, even a small account can potentially grow into a much larger account. When your account size reaches $5000 or more, JTNC suggests you follow the 2.5% to 5% risk target per trade.

Example

Expiry: 27Oct23

Buy: 413 Call

Price: $1.60 or better

Recommended Size: 1

Target Exit: $415 SPY/$2.25

This is an actual trade from October 26, 2023. JTNC sizing recommendations are based on a $5000 account size. If you had a $10,000 account, you would trade 2 options. Given options quotes represent 100 shares of the underlying security, the purchase of a Call option on SPY for $1.60 will actually risk $160 plus commissions. For a $5000 account, the percent risk is computed as follows:

$160/$5000 = 3.2%

This is well within the target 2.5% to 5% range JTNC recommends. Given this is a risk per trade should you subscribe to both JTNC services, you can still take a second trade risking @ the same amount and be within your risk rules.

Why is Sizing Important

Position sizing is crucial for risk management in options trading.

Traders should structure their risk based on a percentage of their account balance.

On average, risking 2.5% to 5% of the account balance per trade is recommended.

Thinking in terms of percentages allows for effective scaling and growth of the trading account.

The math involved in calculating these percentages is relatively straightforward.

Position sizing is an essential aspect of risk management in trading. It involves determining the amount of capital to allocate to a particular trade based on a percentage of the total trading account.

Max Loss: The maximum loss on any trade should not exceed the predetermined risk percentage.