Position size, portfolio delta, and tail-risk rules
| Risk Rule | Guideline | Why |
|---|---|---|
| Position size | Max 2–5% of portfolio per trade | No single trade should threaten the portfolio |
| Portfolio delta | Keep net delta within target range | Prevents accidental directional bet |
| Correlation risk | Avoid concentrated sector exposure | 5 ‘different’ trades in the same sector = 1 big bet |
| Theta budget | Know your daily theta income/cost | Ensures time decay works for, not against you |
| Tail risk | Define max loss for every position | Spreads > naked options for risk definition |
Define your max loss before entry
The #1 risk management rule: define max loss before entry. If you can’t state your max loss in dollars, you don’t understand your position. Use spreads instead of naked options to enforce defined risk.
Calculate your net delta, theta, and max loss
Review your current positions (if any). Calculate your net delta, total theta, and maximum loss per position. Are you comfortable with the worst-case scenario?
How correlated positions compound in a selloff
You have 5 iron condors on 5 different stocks, each risking $500. A broad market selloff hits. What’s your actual risk?
Why five correlated positions are one position
Reading gamma and vega risk concentration
Portfolio manager has $5M allocated to options positions. Gamma exposure: +$200K per 1% move. Vega: +$50K per 1 IV point. What's the RISK concentration?
Check your understanding
Sit with the ideas.
Your options portfolio has: net delta +150, net theta -$50, net vega +$200. What market scenario hurts you the most?
Why: