How to Calculate Position Size for Options Trading
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:
- Calculate your maximum options position size
- Write it down where you trade
- Use it for your next options trade
This Week:
- Practice position sizing calculations
- Test with paper trading
- Refine your approach
This Month:
- Track options position sizing adherence
- Analyze: Did you follow rules?
- 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.