The position-size formula
Risk budget equals account value multiplied by the percentage allocated to risk. Modeled risk per contract equals option premium multiplied by the 100-share standard multiplier and the percentage of premium expected to be lost at the exit. Maximum contracts is the risk budget divided by risk per contract, rounded down.
For example, a $25,000 account risking 1% has a $250 budget. A $2.50 option costs $250 per contract. If the plan exits after a 50% premium loss, modeled risk is $125 per contract and the formula permits two contracts before fees and slippage.
Why the planned loss can be wrong
An option can gap past a stop, lose liquidity or fall to zero. Stop orders do not guarantee an execution price, and the option’s percentage move can be much larger than the underlying move. If you cannot reliably exit, use 100% of premium as the risk assumption for a long option.
Short options and spreads require different risk models. Assignment, exercise, early-exercise risk, margin changes and uncovered exposure can make risk exceed the visible premium or credit. This calculator intentionally covers long premium positions only.
- Round down rather than up to remain within the modeled budget.
- Include commissions and expected slippage in a real trading plan.
- Use a smaller size when liquidity is poor or event risk is high.
- Treat correlated positions as one portfolio exposure, not separate ideas.
Position size cannot repair a weak trade
Risk sizing controls the damage from being wrong; it does not improve expected value. Entry quality, liquidity, volatility, catalyst, exit rules and portfolio concentration still matter. A reasonable workflow defines the invalidation point first, then selects a contract and size that fit it.
Use the result as a ceiling, not a required allocation. Paper trading can show whether the assumed premium loss and actual exits are realistic before capital is committed.