Skip to main content

How to Calculate Position Size for Options Trading

· 7 min read
Karthik
Karthik
Founder, TradeLyser

Options trading is different.

Your risk isn't just the premium paid.
It's the premium paid × number of lots.
Plus margin requirements.
Plus assignment risk.

Let me show you how to size options positions correctly.

The Options Risk Challenge​

Equity vs Options Risk​

Equity trading:

  • Risk: Stop loss distance
  • Simple calculation
  • Clear limits

Options trading:

  • Risk: Premium paid (buying)
  • Risk: Unlimited (selling)
  • Risk: Assignment (short positions)
  • Risk: Time decay
  • Risk: Volatility changes

Much more complex.

Common Options Mistakes​

Mistake #1: "I only paid ₹5,000 premium, so I can risk ₹5,000"

Reality: If you buy 10 lots, you risk ₹50,000

Mistake #2: "Selling options is safe, I'll sell many lots"

Reality: One bad move can wipe out months of premiums

Mistake #3: "I'll use all my capital for options"

Reality: Options can go to zero. Equity can't.

Position Sizing for Options Buying​

The Basic Formula​

For buying options:

Position Size = (Account Risk %) ÷ (Premium Risk %)

Where:
Account Risk % = % of account you want to risk
Premium Risk % = % of premium you expect to lose

Example #1: Buying Call Options​

Setup:

  • Account: ₹5,00,000
  • Risk per trade: 2% = ₹10,000
  • NIFTY 24500 CE @ ₹150
  • Expected loss if wrong: 100% (premium)
  • Lot size: 50

Calculation:

Premium Risk % = 100% (total loss)
Position Size = 2% ÷ 100% = 2% of account
Position Value = ₹5,00,000 × 2% = ₹10,000
Number of lots = ₹10,000 ÷ (₹150 × 50) = 1.33 lots
Round down: 1 lot
Investment: 1 × 50 × ₹150 = ₹7,500
Risk: ₹7,500 (1.5% of account)

Example #2: Buying Put Options​

Setup:

  • Account: ₹3,00,000
  • Risk per trade: 1.5% = ₹4,500
  • RELIANCE 2500 PE @ ₹80
  • Expected loss: 100%
  • Lot size: 250

Calculation:

Position Size = 1.5% ÷ 100% = 1.5%
Position Value = ₹3,00,000 × 1.5% = ₹4,500
Number of lots = ₹4,500 ÷ (₹80 × 250) = 0.225 lots
Round down: Can't buy fractional lots
Maximum: 0 lots (too expensive)
Alternative: Find cheaper option or increase account

Example #3: Buying Multiple Options​

Setup:

  • Account: ₹10,00,000
  • Risk per trade: 2% = ₹20,000
  • Strategy: Buy 1 call + 1 put (straddle)
  • Call: ₹200, Put: ₹180
  • Total premium: ₹380 per lot
  • Expected loss: 100%

Calculation:

Position Size = 2% ÷ 100% = 2%
Position Value = ₹10,00,000 × 2% = ₹20,000
Number of lots = ₹20,000 ÷ ₹380 = 52.6 lots
Round down: 52 lots
Investment: 52 × ₹380 = ₹19,760
Risk: ₹19,760 (1.98% of account)

Position Sizing for Options Selling​

The Margin Challenge​

Selling options requires margin:

  • SPAN margin
  • Exposure margin
  • Premium received (reduces margin)

Risk: Unlimited (theoretical)

Conservative Approach​

Rule: Risk only 1% of account per trade

Example: Selling Call Options

Setup:

  • Account: ₹5,00,000
  • Risk per trade: 1% = ₹5,000
  • NIFTY 25000 CE @ ₹100
  • Margin required: ₹1,20,000 per lot
  • Premium received: ₹5,000 per lot

Calculation:

Maximum margin per trade = ₹5,000
Maximum lots = ₹5,000 ÷ ₹1,20,000 = 0.04 lots
Not possible (minimum 1 lot)

Alternative: Use smaller account portion
Use 0.5% risk = ₹2,500
Still not enough margin

Solution: Use spreads to reduce margin

Using Spreads to Reduce Risk​

Bull Put Spread Example:

Setup:

  • Sell NIFTY 24000 PE @ ₹200
  • Buy NIFTY 23900 PE @ ₹150
  • Net premium: ₹50
  • Margin: ₹25,000 per lot
  • Max loss: ₹4,500 per lot

Calculation:

Account: ₹5,00,000
Risk per trade: 1% = ₹5,000
Max loss per lot: ₹4,500
Maximum lots: ₹5,000 ÷ ₹4,500 = 1.1 lots
Round down: 1 lot
Investment: ₹25,000 margin
Risk: ₹4,500 (0.9% of account)

Advanced Position Sizing​

Kelly Criterion for Options​

Formula:

Kelly % = (Win Rate × Avg Win - Loss Rate × Avg Loss) ÷ Avg Win

Example:
Win Rate: 60%
Avg Win: ₹3,000
Loss Rate: 40%
Avg Loss: ₹2,000

Kelly = (0.6 × 3000 - 0.4 × 2000) ÷ 3000
     = (1800 - 800) ÷ 3000
     = 0.33 = 33%

Too aggressive for options!

Use Fractional Kelly:

  • Quarter Kelly: 8.25%
  • Half Kelly: 16.5%
  • Recommendation: Quarter Kelly maximum

Volatility-Based Sizing​

High VIX (>20):

  • Reduce position size by 50%
  • Options more expensive
  • Higher risk

Low VIX (<15):

  • Normal position size
  • Options cheaper
  • Lower risk

Example:

Normal position size: 2%
High VIX adjustment: 2% × 0.5 = 1%
Low VIX adjustment: 2% (no change)

Options-Specific Risk Factors​

Factor #1: Time Decay​

Buying options:

  • Time works against you
  • Position size should account for time decay
  • Shorter expiry = smaller position

Selling options:

  • Time works for you
  • Can use larger positions
  • But still limited by margin

Factor #2: Volatility​

High volatility:

  • Options expensive
  • Higher risk
  • Smaller positions

Low volatility:

  • Options cheap
  • Lower risk
  • Larger positions possible

Factor #3: Liquidity​

High liquidity (NIFTY, Bank NIFTY):

  • Tight spreads
  • Easy to exit
  • Normal position sizes

Low liquidity:

  • Wide spreads
  • Hard to exit
  • Smaller positions

Factor #4: Assignment Risk​

Selling options:

  • Risk of early assignment
  • Need to hold underlying
  • Account for assignment cost

Example:

Sell RELIANCE 2500 CE @ ₹50
If assigned: Must buy 250 shares @ ₹2,500
Cost: ₹6,25,000
Account: ₹5,00,000
Problem: Can't afford assignment!

Position Sizing by Strategy​

Strategy #1: Long Calls/Puts​

Risk: Premium paid
Position size: 1-2% of account
Example: ₹5,00,000 account = ₹5,000-₹10,000 per trade

Strategy #2: Covered Calls​

Risk: Underlying stock risk
Position size: Based on stock risk (2% rule)
Example: 100 shares × ₹2,500 = ₹2,50,000 position

Strategy #3: Cash-Secured Puts​

Risk: Stock assignment risk
Position size: Based on assignment cost
Example: ₹2,50,000 cash for ₹2,500 strike put

Strategy #4: Spreads​

Risk: Spread width
Position size: 1-2% of account
Example: ₹5,000 risk for ₹5,00,000 account

Strategy #5: Iron Condors​

Risk: Spread width
Position size: 1% of account
Example: ₹5,000 max loss for ₹5,00,000 account

Real Examples​

Example #1: NIFTY Call Buying​

Setup:

  • Account: ₹5,00,000
  • NIFTY 24500 CE @ ₹150
  • Expiry: 1 week
  • Risk: 2% = ₹10,000

Calculation:

Premium per lot: ₹150 × 50 = ₹7,500
Maximum lots: ₹10,000 ÷ ₹7,500 = 1.33
Round down: 1 lot
Investment: ₹7,500
Risk: ₹7,500 (1.5% of account)

Result: Good position size

Example #2: RELIANCE Put Selling​

Setup:

  • Account: ₹5,00,000
  • RELIANCE 2500 PE @ ₹100
  • Margin: ₹1,50,000 per lot
  • Risk: 1% = ₹5,000

Calculation:

Margin per lot: ₹1,50,000
Maximum lots: ₹5,000 ÷ ₹1,50,000 = 0.033
Not possible (minimum 1 lot)

Problem: Margin too high for account size
Solution: Use spreads or increase account

Example #3: Bank NIFTY Spread​

Setup:

  • Account: ₹5,00,000
  • Bull Put Spread
  • Max loss: ₹3,000 per lot
  • Risk: 1% = ₹5,000

Calculation:

Maximum lots: ₹5,000 ÷ ₹3,000 = 1.67
Round down: 1 lot
Investment: ₹15,000 margin
Risk: ₹3,000 (0.6% of account)

Result: Good position size

Common Mistakes​

Mistake #1: Using All Capital​

Wrong: "I have ₹5L, I'll buy ₹5L worth of options"
Right: Risk only 1-2% per trade

Mistake #2: Ignoring Margin​

Wrong: "I'll sell 10 lots, I only need ₹50K"
Right: Check margin requirements first

Mistake #3: No Stop Loss​

Wrong: "Options can't lose more than premium"
Right: Set stop loss at 50% premium loss

Mistake #4: Over-Leveraging​

Wrong: "I'll buy 20 lots with ₹1L"
Right: Buy 1-2 lots maximum

The Bottom Line​

Options position sizing is more complex than equity.

Key principles:

  • Risk only 1-2% per trade
  • Account for margin requirements
  • Consider assignment risk
  • Use spreads to reduce risk
  • Never risk more than you can afford to lose

Simple rule: If you're not sure, use smaller position size.

Take Action Now​

Today:

  1. Calculate your maximum options position size
  2. Write it down where you trade
  3. Use it for your next options trade

This Week:

  1. Practice position sizing calculations
  2. Test with paper trading
  3. Refine your approach

This Month:

  1. Track options position sizing adherence
  2. Analyze: Did you follow rules?
  3. Adjust based on results

👉 Use TradeLyser Options Position Calculator
👉 Download: Options Position Sizing Calculator
👉 Next: Risk-Reward Ratios - Why 1:3 Isn't Always Better

How do you size your options positions? What's your biggest challenge? Share below.