Value Options Letter

Risk Management · 10 min read

Position Sizing for Options Income

The single biggest determinant of long-term results that almost nobody writes about properly.

Why position sizing dominates everything else

You can pick excellent trades and still lose money if you size them wrong. You can pick mediocre trades and grind out a real return if you size them right. Over a long enough horizon, the quality of your sizing discipline matters more than the quality of any individual idea.

The reason is asymmetry. A position that’s too small in a winner costs you opportunity. A position that’s too large in a loser can take you out of the game. Those two outcomes are not symmetric, and your sizing rules need to reflect that.

The cardinal rule: size as if you will be assigned

When you sell a cash-secured put, the question isn’t “how much premium can I collect?” The question is “how big a position in the underlying am I willing to own if this gets exercised?”

That reframing changes everything. A $40 strike on 5 contracts is $20,000 of stock exposure if assigned, not a $300 premium ticket. If $20,000 is too large a single-stock bet for your portfolio, then 5 contracts is too many — regardless of how attractive the premium looks.

The way professional value investors think about this is simple: decide what your maximum equity position size in any one name should be, then back into the contract count from the strike. Premium is the reward for taking the risk — it’s not the unit of measurement for the position.

A practical framework

Here’s a defensible starting framework, with the caveat that the right numbers vary by portfolio size, risk tolerance, and conviction. These are not rules; they’re reasonable anchors to work from.

Per-trade sizing

For an investor running a diversified options-income portfolio, a common starting point is to size each cash-secured put so that if assigned, the resulting equity position would be 3-7% of the total portfolio. Lower end for ordinary conviction, higher end for high-conviction value setups where you genuinely want a meaningful position.

Below 3% and assignment doesn’t do much for the portfolio even if the trade plays out perfectly. Above 7-8% and a single broken thesis starts to materially damage long-term returns.

For a $250,000 portfolio, that translates to roughly $7,500 to $17,500 of cash collateralized per cash-secured put. At a $40 strike, that’s 2-4 contracts. At a $100 strike, that’s 1 contract or sometimes none.

Per-ticker exposure cap

No single ticker should be permitted to dominate the portfolio, even if your conviction is enormous. A reasonable hard ceiling is 10% of portfolio capital exposed to any one underlying, counting both currently-held shares and the assignment value of any open puts on the same name.

That means if you already own 100 shares of a $50 stock ($5,000 position) and you’re running a $250,000 portfolio, you have $20,000 of additional headroom in that ticker before hitting a 10% cap — so at most 4 more contracts at the $50 strike.

This is the rule that prevents the most common Wheel disaster: stacking puts and covered calls on the same name, getting assigned multiple times in a falling market, and waking up with 30% of the portfolio in one stock you didn’t consciously choose to make a 30% position.

Per-sector exposure cap

Tickers within a sector tend to fall together. If you’re running cash-secured puts on three different regional banks, that’s not three diversified positions — it’s one sector bet in three wrappers. A reasonable cap is 25-30% of portfolio capital exposed to any one sector, and that includes the assignment value of all open puts plus existing equity positions in the sector.

Sector caps are the ones investors most consistently violate because they don’t feel like concentration. Three different tickers, three different theses — surely that’s diversified? It’s not, if all three correlate to the same macro factor.

Total cash deployed cap

For cash-secured puts specifically, you’ll need to keep uninvested cash in your account to back the puts. A common ceiling is 50-75% of the portfolio committed as cash-secured collateral at any one time. The rest stays free for new opportunities, equity positions you choose to hold outright, and the inevitable margin call moments when multiple things go wrong at once.

Investors who run at 95-100% deployed are running on a tightrope. The first time the market gives them a buying opportunity at washout prices, they have no dry powder. The second time something unexpected goes wrong, they’re forced to close positions at exactly the wrong moment.

Sizing differs by trade type

Not every options-income trade has the same risk profile, and sizing should reflect that.

Cash-secured puts on high-conviction names

These are the trades you’d size larger — toward the top of your per-trade range. The whole point of selling a put on a great business at a strike below its fair value is that you genuinely want to be assigned at that price. If it happens, you want a meaningful position.

Cash-secured puts on yield-harvesting trades

If you’re selling a put on a name that’s acceptable but not exciting at the strike, size it smaller — toward the bottom of your range. You’re harvesting premium with assignment as an acceptable but not desired outcome. Smaller sizing reflects the fact that an unwanted assignment in a name you’re lukewarm on is a worse outcome than the same assignment in a name you love.

Covered calls

Sizing for covered calls is determined by the underlying equity position, not by the call itself. If you have 400 shares, you’re writing 4 calls. The sizing decision was made when you bought (or were assigned) the shares. The call decision is about strike and expiration, not size.

Wheel rotations

Wheel rotations require the strictest sizing discipline of any options-income strategy because assignment is part of the design. See our companion piece on the Wheel Strategy from a value investor’s perspective. If you’re wheeling, the per-ticker cap is more important than for one-off cash-secured puts because Wheel rotations have a built-in tendency to accumulate exposure over time.

The concentration creep problem

The single most common way investors blow up an options-income portfolio is concentration creep. It happens like this:

  1. You sell a cash-secured put on a name you like. Premium hits.
  2. The stock drops a little. You sell another put at a lower strike. More premium.
  3. The stock keeps drifting. You sell a third put. Now you have three layers of exposure to the same name.
  4. The stock drops sharply. All three puts get assigned in a short window. You now own a position three times the size you ever consciously decided to take.
  5. The stock drops further. You’re now sitting on a significant loss in a position you never wanted to have at that size, and your portfolio is mauled.

The cure is enforcing the per-ticker exposure cap including all open puts. If you’ve already sold two puts on a name and adding a third would push you past your 10% per-ticker cap, you don’t sell the third put. Period. The premium isn’t worth it.

Sizing in a smaller portfolio

A common question: what if your portfolio is smaller — say $50,000? At a 5% target per assignment, that’s $2,500 per put. Most decent businesses trade at strikes that put $2,500 below the level of one contract. What do you do?

You have three options. First, focus on lower-priced high-quality names where one contract fits your sizing budget. Second, accept slightly larger per-position sizing as a consequence of running a smaller portfolio — perhaps 7-10% per assignment instead of 3-7%. Third, run fewer simultaneous positions and rotate more deliberately.

What you should not do is reach for high-IV, low-priced names (often the worst quality) just because they fit the contract math. That path leads to a portfolio of garbage stocks that happen to fit the budget — the exact opposite of a value-first approach.

What to do next

  • Calculate your current exposure by ticker and by sector. Add up equity positions plus the assignment value of any open puts. You may discover concentrations you didn’t realize you had.
  • Write down your per-trade, per-ticker, per-sector, and total deployed caps. Tape them somewhere visible. The discipline of having written rules is half the battle.
  • Before placing any new trade, check it against the caps. If the new trade would push you past any of them, the new trade doesn’t get placed — or you close something first.
  • Read Cash-Secured Puts 101 and The Wheel Strategy for the trade mechanics that these sizing rules are built around.

Disclaimer: This article is educational content, not personalized investment advice. Position sizing decisions depend on individual circumstances. Options trading involves risk and is not suitable for every investor. Past performance is not indicative of future results. Numbers in this article are illustrative. Value Options Letter is a subscription research publication and is separate from T&T Capital Management LLC. For personalized advice, consult a qualified investment professional.