Position sizing for option buyers: how much to risk per trade

Most oversized trades start with the question 'how much can I make?'. Position sizing reverses it: decide how much you are prepared to lose if the trade is wrong, then work out the quantity that keeps the loss to that amount.

Many disciplined traders risk between 0.25% and 1% of their account on a single trade. The exact figure matters less than choosing one and keeping to it.

Risk amount = account balance × risk per trade %

Risk per unit = entry premium − stop premium

Quantity = risk amount ÷ risk per unit, rounded down to a whole lot

Options trade in lots set by the exchange, and lot sizes are revised from time to time. Always use the current lot size from NSE's contract specifications.

Illustrative numbers only. Assume a lot size of 50 units to keep the arithmetic simple.

If a single lot would risk more than your limit, the answer is not to take the trade anyway. Either the stop is in the wrong place for your account size, or the trade is too large for it.

Divide the daily loss limit by your risk per trade to see how many consecutive losses you can absorb in a day. With a 3% daily limit and 0.75% per trade, four full losses take you to the limit. Many traders set a personal rule to stop after two or three losses, well before the limit.

• Positions held overnight (NRML) can open at a very different price the next morning. A stop does not protect you from a gap, so size overnight positions more conservatively.
• Slippage means you may exit worse than your stop price in a fast market. Build a small buffer into your risk per unit.
• Several open positions in the same index add up to one larger position. Count them together.