A Note on Position Sizing

Which piece of pie would you choose, #1, #2 or #3 ?My friend Josh Brown, aka @ReformedBroker on twitter, made a great point Sunday in Two Things That Are Never Discussed in the Financial Media, when he wrote about the lack of discussion on position sizing and timeframe. Let’s deal with one of them here, position sizing.

Like with systems for trading the stock market, there is no one right way to determine this. What you need to consider is that along with other factors your sizing criteria need to protect against a crisis and allow for success. Here are the simple rules I use.

1. Limit Long stock positions to 7.5% of portfolio capital.
2. Limit margin usage on short stock positions to 2% of capital.
3. Limit Premium on long Options and Debit Options Combos (Spreads, Calendars, Butterflys etc.) to 2% of Capital and no more than 50 contracts.
4. Limit margin usage to no more than 7.5% of portfolio capital on short options positions (sold options, credit spreads etc). This is estimated by assuming 10% of the short strike as margin.

There you go. Four simple rules. They of course are tailored to my style of trading, timeframe (swing to position) and strategies and subject to adequate liquidity. What are your rules?

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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