Position Sizing is Key in Options Trading
There are many aspects to trading that are important. Being able to look at a chart and read the story the chart is telling is important. Having a system or process that you use to determine setups for a trade is important. But probably most important of all is risk management. That is why I named this website, Beyond the Chart. There is more to trading than bars on the chart.
How much of my capital to risk on any one given trade. How to manage that risk with the use of stops? Where do I take my profit? I believe position sizing is one of the most important components of trading. It is especially important if you trade options or futures. Now when I talk about options trading I’m talking about directional trading using outright buys of puts and calls or buying directional spreads.
Quite a while back I read a very interesting book called “Way of the Turtle” by Curtis Faith. Curtis was one of the original Turtles (traders) mentored by Richard Dennis and William Eckhardt. In the book Curtis tells the story of the Turtles and talks a lot about risk management. I found the section on position sizing very interesting and felt that it could be adapted to options trading. Here is what I learned. Continue reading