Options Risk Management: The Foundation of Success

Why Risk Management is Critical

95% of options traders lose money, primarily due to poor risk management. Successful traders don't have a better win rate—they have superior risk management that protects capital and lets winners run.

Core Risk Management Principles:

1. Position Sizing Rules

• Never risk >2-5% per trade: On $10,000 account, max $200-500 risk
• Scale based on confidence: Less certainty = smaller size
• Account for correlation: Don't have 5 bullish tech trades
• Use defined-risk strategies: Spreads, not naked options

2. Portfolio Allocation

• Limit options to 20-30% of total portfolio
• Keep 50%+ in stocks/ETFs
• Maintain cash reserve for opportunities
• Diversify across strategies and sectors

3. Stop Loss Management

• Debit Spreads: Exit at 50% loss
• Credit Spreads: Exit at 2x credit received
• Iron Condors: Exit at 2-3x credit
• Time-Based: Exit if thesis not working by 50% of time

Managing Portfolio Greeks:

Delta Management

• Track net delta exposure
• Keep delta neutral or directional bias <30%
• Hedge with opposite delta positions
• Use portfolio delta to gauge directional risk

Theta Management

• Positive theta = option seller (time decay friend)
• Target $50-$100 daily theta on $10k account
• Balance theta with vega exposure
• Theta accelerates last 30 days

Vega Management

• Positive vega = benefit from IV increase
• Negative vega = benefit from IV decrease
• Monitor IV rank across positions
• Reduce vega exposure before events

Common Risk Management Mistakes:

• Doubling down on losing trades
• Not having a plan before entry
• Letting emotions override rules
• Ignoring portfolio concentration
• Trading too large for account size