Risk Management in Options Trading

Proper risk management is crucial for long-term success in options trading.

Position Sizing

Position sizing determines how much capital to allocate to each trade.

Guidelines:

  • 1-5% of portfolio per position maximum
  • Account for maximum potential loss
  • Consider correlation between positions
  • Scale position size with conviction

Example:

$100,000 portfolio → $2,000-$5,000 max risk per trade

Learn More:

Rolling Options

When to Roll

  • Approaching expiration with profit
  • Avoiding assignment
  • Capturing more premium
  • Adjusting to market conditions

Roll Out

Same strike, later expiration

Roll Up/Down

Different strike, same expiration

Roll Up/Down and Out

Different strike, later expiration

Strategy Applications:

Managing Assignments

Assignment Scenarios

Put Assignment

  • Stock purchased at strike price
  • Consider selling covered calls
  • Evaluate holding vs selling stock

Call Assignment

  • Stock sold at strike price
  • Consider selling puts to re-enter
  • Evaluate new positions

Pro Tip:

Always have a plan for assignment before entering the trade.