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Position Size: A Matter of Life and Death (for a Trader)


This is
what I've been considering (Conversation started earlier). I figure the kites provide great protection
if the Iron Condors don't behave, yet they reduce the premium of an IC
significantly.  The risk is minimal but so is the profit.

So if I exited both the kite and the 10-lot of Iron Condors at the same time – for say
only $300 profit, it wouldn't be enough for me. However, if I put on 10
times as many I would have approx $3000 profit ,which is more acceptable. Thoughts?



You may be too young to remember Lost in Space, a TV show from the mid-1960s, but one line from that show comes to mind:


1) It requires 10k margin to do a 10-lot (of 10-point iron condors).

It requires 100k of available margin to increase size by 10 times and trade a 100-lot.

If you earn $300 when risking $10,000 that is no different from earning $3,000 when risking $100,000.

2) The risk graph looks nicer.  And it is nicer.  Perhaps it's 'nicer' by enough for you to move from 10 to 12 iron condors.  But to move to 100?  No way.

It is not that safe.  It is just safer.  And the final safety is going to depend on skills as a risk manager.  Do you have enough confidence in those skills to up position size by an order of magnitude?

3) I  hope that you are suggesting, or at least asking about, increasing position size by a factor of 10 because you are new to the options world. 

I would tremble at the thought of an experienced trader asking this question.

Increasing position size by anything except a small increment is fraught with danger.  First, you don't know how you will react if and when trouble looms.  Second, you may be risking almost your entire account on a single trade.  You just cannot do that and expect to survive. 

It's unlikely you would lose anything resembling the maximum 100k (yes, this is possible, depending on strikes chosen), but how can you afford to take that chance?  Would you be able to exit a trade to lock in a $20,000 loss if you judged the position too risky to hold?  If you cannot do that, you will become frozen and unable to take needed action.

4) Look at your risk graph the day prior to expiration.  Note how those kites have gone from a 'rescue plan' to a potential disaster.

I know you 'plan' to exit prior to expiration, but many times traders are just unwilling to pay the necessary cost to exit.

5) I agree that you may indeed do nicely with this concept.  But all it takes is one bad situation – guaranteed to occur (but who knows when?) and you may be permanently out of business.

Please do not do this.  If you get some practice with the 10-lots, and demonstrate a good ability to handle risk for a minimum of six months, then I would consider – and I mean consider (not automatically doing it), moving size up to where you buy two kites instead of one.  Under no circumstances can that be more than 20-lots of an IC, and I think that's too large of a jump in size.

One more point: When I said 'demonstrate ability to handle risk,' If you have six easy wins with no serious adjustment decisions, that does not count.  I am referring to situations in which you face serious decisions and make a good choice each time. I am referring to having the courage to do the right thing and not taking on too much risk just because you are frozen with indecision.  If you can do that a few times – then and only then can you consider yourself experienced enough to move up (gradually) in size.


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