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Too Many Option Positions?

Mark, another question.

Do you have a recommended number of options you
should hold at any one time? I'm finding this will take some work to do
it right, and holding too many at once might get out of hand. Thus I
was wondering if your experience would suggest a recommended number of
different options to be holding and working on at any one time? A
recent stock seminar I took recommended to invest in 6-10 stocks at any
one time, not sure how that translated into # of options at any one

Thanks for your time!

Jimmy J


Hi Jimmy,

Trading stocks takes less time than trading options (unless you are a day trader).  By that I mean you won't be making decisions every day or every week.  You buy the stock for a reason, do your research on a continuous basis, and eventually dump the loser or take your profits on the winners.  But less time is involved than with option positions.

Why? Option positions have risk that can be quantified and controlled.  That's advantageous, but it also requires you to take the time to think about those risks.  Most of the time, they will be within your comfort zone and there's nothing about which to be concerned.  Look at the Greeks (supplied by your broker – or at least, they should be) and consider if risk is in line or not.  this takes more time than a stock position.

Options are also time sensitive.  The positions only are alive for a relatively short period of time, and you must make decisions on buying more, closing, or most commonly – holding.  You do that on a regular basis.

I suggest you begin with no more than three different positions – especially if you are talking about positions on three different underlying assets.  And two is plenty for many rookies.  If you are concerned about being under-diversified, I can understand that.  Your choice becomes: a) trade more positions than you can comfortably handle (bad idea); b) use index options (or ETF options) to diversify.

Here's why I believe in limiting the number of positions:  If your positions can lose money on a big market move (iron condor, credit spreads, covered calls etc), then such a move will require you to take action on each position.  Each takes time and you will feel rushed to make decisions.  You could easily be losing money on other positions as you decide what to do to adjust one position.  That's unwanted pressure.  Minimize that by trading fewer underlying assets.  (I trade only one underlying, RUT).  Risk management is essential to long-term success, so don't deny yourself the time to do it correctly.

But if you buy options (a tough way to make money), then there is no pressure to act in a hurry when the market moves.  You may even have good profits to lock in.  If that is your strategy then you can easily handle more than the three I mentioned above.

How harried, or comfortable, you feel will tell you the right answer.  But, build slowly so you don't go past your ability to handle the portfolio in a crisis.

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