Most traders who blow up their accounts did not pick terrible trades. They simply risked too much on each one. Options are leveraged, so position sizing matters even more than with shares.
Decide your maximum risk per trade
A common rule is to risk no more than 1 to 2 percent of your account on any single trade. With a 5,00,000 account, that means a maximum loss of 5,000 to 10,000 per position. Size the trade from that number, not from how confident you feel.
Know your worst case before you enter
- For bought options, the worst case is the full premium.
- For spreads, the worst case is the width of the spread minus the credit, or the debit paid.
- For naked short options, the loss can be far larger than the premium. Use defined-risk structures until you have real experience.
Plan the exit in advance
Write down where you will take profit, where you will cut the loss and what you will do as expiry approaches. Deciding in the middle of a fast market rarely goes well.
Avoid common mistakes
- Doubling down on a losing position to win it back.
- Holding short options through major events without a plan.
- Putting a large share of the account into very cheap, far out-of-the-money options.
- Ignoring brokerage, taxes and slippage, which add up quickly with frequent trading.
A trading plan you can follow on a bad day is worth more than any single strategy.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.