Trade Size Allocation PDF

Trade Size &
Allocations
Published by Option Alpha. All Rights Reserved.

About the
Author
Kirk Du Plessis is a full-time
options trader, real estate investor
and entrepreneur.
Before launching Option Alpha more than 8 years ago, he

was an Investment Banker for Deutsche Bank in NY with
the Mergers & Acquisitions group, a Capital Markets
Analyst for BB&T in DC covering REITs and a Senior Loan
Officer in the mortgage industry.
His training courses and coaching programs have helped

thousands of traders from around the world learn how to
make smarter options trades. He was recently featured in
Barron’s Magazine as a contributor to the Annual Broker’s
Review and is the head trader here at Option Alpha.
Though a long-time resident of Virginia, he currently lives

in Pennsylvania with his beautiful wife and daughter.
Published by Option Alpha. All Rights Reserved.

Why Trade Small Positions?
One of the most integral pieces to a profitable options
trading system is your ability to trade hundreds of
positions over the course of a year. Because we trade on
probabilities we need a lot of “data points” or “individual
trades” so that the targeted probability we are focusing on
has a greater chance of being realized.
A simple yet powerful example of the Law of Large

Numbers is explained when flipping a simple coin:
The probability of getting Heads or Tails is 50/50. But that
doesn’t mean on your first 2 flips will show this result (or
your first 4 or 8 flips. You may see a string of 8 Heads in a
row or 8 Tails in a row right? But over time the more you
flip the coin the closer the actual results will come to the
expected 50/50 outcome.
The same holds true when trading options. . .
For example, if you are placing 70% probability of success

trades that doesn’t mean if you make 10 trades all year
that 7 will be winners and 3 will be losers. It just might not
happen so “perfect” in your first 10 trades.
But I almost guarantee that if you place 1,000 trades over

the course of 1-3 years (notice we don’t promote success
overnight) you are likely to see your percentage of winners
very close to the expected 70% level. It’s just a matter of
time and you can’t argue with the math behind it.
For us to be able to make so many trades we therefore

need to make sure that our positions are small so that 1 or
2 trades that very bad won’t blow up our account. In this
blueprint we’ll give you some guidelines on position sizing
that you can use as with your own trading.
As always, you may need to scale up or down depending

on your individual situation (commissions, account size,
trading style etc) to fit your needs better. 
The “Sliding” Scale Approach
At Option Alpha we favor a sliding scale to position sizing
between 1% and 5% allocation of risk per trade.
This means that during times of high IV when option

premiums are rich we actually want to be slightly more
aggressive because the odds are more in our favor and
move our positions sizes up towards 5%.
Conversely, during times of low IV we want to be extra

conservative with position size and scale back towards 1%
because our probability of success will not be as great.
Recognizing that our “edge” in trading options comes

when implied volatility is highest, we should be confident
and comfortable with smaller positions (or staying on the
sidelines altogether) when IV is low.
The tables in the pages to follow will help you quickly

narrow down the optimal positions size based on various
different account sizes and allocation percentages. 
Risk Per Trade By Account Size
1% 2% 3% 4% 5%
$5,000 $50 $100 $150 $200 $250
$10,000 $100 $200 $300 $400 $500
$15,000 $150 $300 $450 $600 $750
$20,000 $200 $400 $600 $800 $1,000
$25,000 $250 $500 $750 $1,000 $1,250
$50,000 $500 $1,000 $1,500 $2,000 $2,500
$100,000 $1,000 $2,000 $3,000 $4,000 $5,000
$250,000 $2,500 $5,000 $7,500 $10,000 $12,500
***Risk per trade is based of the maximum loss on the trade or initial margin requirement to hold the
position. For example, if you sell a $1 wide credit spread and take in a $30 credit your max risk is $70. If
you sold a $2 wide credit spread taking in the same $30 your max risk would increase to $170. For
undefined risk trades we will take the initial margin requirement. For example, if you sell a naked put
below the market and take in $90 of credit but the margin requirement is $1,200 then we base the max
account size off the $1,200 margin requirement needed to hold the position. 
How Many Contracts to Trade?
Using the table from above we can quickly calculate how
many contracts or spreads you can trade for each
position. Lucky for you, it’s a very easy 3-step formula.
Step 1: Determine Your % Max Risk Per Trade
This comes from the table above but let’s just say that you
are using 2% of your account equity on each trade. If you
have an account of $50,000 this would mean that no more
than $1,000 of risk ($50,000 X 2%) is allowed per trade.
Step 2: Determine The $ Risk Per Spread
Let’s assume you are trading a SPY 175/170 Put Spread

and take in a credit of $100. The difference in strikes is 5
points (or $500) less your credit of $100, so the max risk
on this trade is $400 per spread. Undefined risk trades will
use the initial margin required to hold the position.
Step 3: Divide % Max Risk by $ Risk Per Spread
With both of the figures from above we simply divide the

max percentage allocation per trade from #1 by the risk
per contract from #2. In our example above it would be
$1,000 / $400 = 2.5 spreads. Based on your risk tolerance
you can trade at most 2 vertical spreads (rounding down). 
We help you make “smarter”
more profitable trades…
We help educate and coach options traders on all levels:

from people just starting out to advanced traders with
multi-million dollar portfolios (and everyone in between).
Since 2007 more than 2.3 million people have trusted

OptionAlpha.com to bring them the most amazing training
on options trading, making us a clear leader in this market.
We believe that there is a huge lack of financial literacy

and a gap that we aim to close by delivering the best
possible content in multiple formats for you to consume:
blog posts, video tutorials, webinars, podcasts, case
studies, live events, etc.
Our goal is to pull back the curtain and give you the best
online courses and training possible in all the right areas
so that you can learn to make decisions for yourself.
Because at the end of the day, making smarter trades isn't
just our tagline - it's our mission for you.

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Trade Size &

Published by Option Alpha. All Rights Reserved.

Before launching Option Alpha more than 8 years ago, he

His training courses and coaching programs have helped

Though a long-time resident of Virginia, he currently lives

Published by Option Alpha. All Rights Reserved.

A simple yet powerful example of the Law of Large

The same holds true when trading options. . .

For example, if you are placing 70% probability of success

But I almost guarantee that if you place 1,000 trades over

For us to be able to make so many trades we therefore

As always, you may need to scale up or down depending

This means that during times of high IV when option

Conversely, during times of low IV we want to be extra

Recognizing that our “edge” in trading options comes

The tables in the pages to follow will help you quickly

$5,000 $50 $100 $150 $200 $250

$10,000 $100 $200 $300 $400 $500

$15,000 $150 $300 $450 $600 $750

$20,000 $200 $400 $600 $800 $1,000

$25,000 $250 $500 $750 $1,000 $1,250

$50,000 $500 $1,000 $1,500 $2,000 $2,500

$100,000 $1,000 $2,000 $3,000 $4,000 $5,000

$250,000 $2,500 $5,000 $7,500 $10,000 $12,500

Step 1: Determine Your % Max Risk Per Trade

Step 2: Determine The $ Risk Per Spread

Let’s assume you are trading a SPY 175/170 Put Spread

Step 3: Divide % Max Risk by $ Risk Per Spread

With both of the figures from above we simply divide the

We help educate and coach options traders on all levels:

Since 2007 more than 2.3 million people have trusted

We believe that there is a huge lack of financial literacy

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