Position Sizing and Stop-Loss Rules for Selling Options on US Stocks

Which comes first — the position size or the stop-loss?

Position size comes first, and the ordering is not a stylistic preference. Contract count is the only variable that is 100% under your control before entry. Implied volatility, the gap that prints at the open, whether your exit order finds a counterparty — all of those are negotiated with the market after you are already committed. Size is decided while you still have every option open, which is exactly why it is the first line of defense and the stop-loss is only the second.

The reason is mechanical, not philosophical. A stop on a short option is a conditional instruction that needs somebody quoting a fillable price at the moment you need out. On an earnings gap, a trading halt, or a Monday open after a weekend headline, the level you planned to exit at may simply never trade. When that happens, your realized loss is set by the structure you sold, not by the number you typed into the platform. For a defined-risk vertical the ceiling is (spread width − credit) × 100 per contract. For a naked short put there is no ceiling worth planning around.

So the framework below is built on one assumption: size every position as if the stop will fail. The stop, or the Delta ladder that replaces it, is what usually saves you money. Sizing is what keeps you solvent.

The three numbers you fix before you open a chart

• Per-trade risk: 1% of account equity, 1.5% absolute ceiling.
• Per-underlying aggregate risk: 5% of account equity across every open tranche in that ticker.
• Tranche count: 3–4 entries per underlying, at separated strikes — the same logic as scaling into a stock position rather than buying it all at one price.

Why there is no third, more aggressive tier

There are two tiers on purpose. Above Delta 0.30 the speculative share of the position rises faster than the credit does, and the long-run survival expectancy of the account deteriorates — so no "aggressive" tier is published here. If a strike looks attractive only at Delta 0.35 or higher, the honest read is that the premium is compensation for a risk you have not modelled, not an opportunity the market left lying around.

The same discipline applies to the naked-selling discount. Suppose your defined-risk arithmetic supported 10 contracts. Going naked on the same underlying does not mean 10 contracts, and it does not mean 5. Multiply by 0.3: 10 contracts becomes 3. The discount exists because a gap through your short strike has no long leg to stop it, and the honest way to price that is fewer contracts rather than a tighter stop.

The mistake that inflates size three to five times

The single most common sizing error among retail sellers is reading the 5% risk unit as a per-trade allowance. On a US$50,000 account, US$2,500 ÷ US$350 = 7 contracts. If you believe that is the size of one entry, you will open 7 contracts three times across three strikes and carry 21 contracts — roughly US$7,350 of aggregate maximum loss, close to 15% of the account, in a single name. Nothing about the trade felt reckless at any step. The arithmetic did all the damage.

A second error is sizing off the credit received instead of the loss at risk. Collecting $1.50 on a $5-wide spread feels like a $150 position; it is a US$350 position. Credit is the reward column. Width minus credit is the risk column, and only the risk column belongs in the sizing formula.

What to write down so the framework survives contact with a bad week

Put the four numbers on one page and keep them where you place orders: dollars per trade, dollars per underlying, entry Delta band, and the two exit Deltas. Everything else in this article is derivation. A framework you have to re-derive at the moment a position moves against you is not a framework — it is a mood.

Then log every entry with five fields: underlying, structure, maximum loss per contract, contracts opened, and cumulative dollars at risk in that ticker. The fifth field is the one that catches the failure described above, because it is the only place where three separately reasonable tranches reveal themselves as one oversized bet.

One note on the ratings used in the screen above: the PV rating system — PV Institutional Demand, PV Relative Strength, PV Profit Quality — was developed independently as a methodology and is not a translation or reproduction of IBD MarketSurge's original ratings. External moat frameworks such as Porter's five forces, Hamilton Helmer's 7 Powers and Morningstar's Economic Moat rating are worth reading and belong to their respective authors; the written moat test on this site is Filter 2 — ROE, EPS growth and PV Profit Quality — and nothing else.

All examples here are US-listed options: US dollar denominated, contract multiplier 100.

Author: 柴柴行者 Shiba the Disciplined — 國立大學 MBA · 前金融交易所從業人員 · 產業研究員 · ProfitVision LAB 創辦人. Editorial stance: I teach you how to think, not just what to do.

Disclaimer: This analysis is provided for research purposes only and does not constitute investment advice. Investing involves risk; please evaluate carefully in light of your own financial circumstances. 本文分析僅供研究參考，不構成投資建議；投資涉及風險，請依個人財務狀況審慎評估。

常見問題

How much of my account should I risk on a single option sale?

Use 1% of account equity as the default and treat 1.5% as an absolute ceiling. On a US$50,000 account that is US$500 to US$750 of maximum loss. Divide that figure by the maximum loss per contract — for a $5-wide spread sold at $1.50, that is (5 − 1.50) × 100 = US$350 — and round the result down, which gives 1 contract at 1% and 2 contracts at 1.5%.

Does the 5% risk unit mean I can lose 5% on one trade?

No, and this is the most expensive misreading in options selling. The 5% risk unit is the aggregate maximum loss of every open position in the same underlying, capped at 5% of the account. Read as a per-trade allowance across three or four layered tranches, it inflates your contract count by roughly three to five times and turns one ticker into 15% of your equity.

Should I even use a stop-loss on short options?

Yes, but rank it second. Position size is the first line of defense because it is fully controllable before entry; a stop is conditional on someone quoting a fillable price when you need out, and gaps or halts can break that. In practice the Delta ladder does the work: cut the position in half at short Delta 0.40 and close all of it at 0.55.

Is selling naked puts ever acceptable under these rules?

Basically it is avoided, and it is considered only on S&P 500 constituents with deep option liquidity. When it is used, take the contract count your defined-risk arithmetic supported and multiply by 0.3 — 10 contracts becomes 3 — as an explicit gap discount, because there is no long leg to cap the loss.

What happens if my spread becomes illiquid and I cannot exit?

That is why the underlying is screened before the premium. Restrict yourself to index options or high-liquidity single-stock options with open interest of at least 100 on the strikes you touch. On a thin name, a position showing 60% of maximum profit can still finish at full maximum loss — spread width minus premium — purely because no reasonable bid exists when you need one.