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.


3 Responses to Too Many Option Positions?

  1. Mark,
    I trade 3 different Indexes to diversify my risk and spread out my size, however all 3 behave quite simmilar to one another therefore it seems quite futile to continue doing so and it does also consume more time having to pay attention to all 3. I have considered becomming proficient in just one index but that would require taking on more size which leaves me at the mercy of 1 index. How do you manage this risk?
    I have also looked into other possibilities such as trading a gold index as a form of diversification. Any thoughts on this?

  2. Mark Wolfinger 09/13/2009 at 11:28 PM #

    I agree that the benefits of diversification are usually (but not always) negated by the extra work required when things don’t go as planned. I trade only one index myself.
    If you trade 10 lots in each of three indexes, I don’t think that’s more size than 30 spreads in a single index. [assuming the risk of each spread is similar; i.e. all 10-point spreads].
    Here are my thoughts:
    1) If the position makes you uncomfortable, then it is too much size
    2) You can diversify in a single index by not going all in at one time. That way you will have some different strike prices for similar spreads. You may also decide to have spreads with two different expiration dates alive at the same time.
    3) You will find the idea of owning extra options attractive when you have all your spreads in a single index. One or two extra put or call options can do a fair amount of good.
    4) If you find it worth the extra work to feel that you are more diversified, they there’s nothing wrong with doing as you are doing. I agree that it appears to be futile, and will be futile most of the time. This is truly a comfort zone decision. If you switch to a single index, you will soon know how glad (or unhappy) you are that you made the switch..
    5) I don’t like commodities – but that’s because i know nothing about them or how to trade them. Sure an option is an option, but it’s very important to understand the underlying asset.
    If you are referring to an index composed of gold stocks, rather than the metal, that is probably a reasonable idea.

  3. Thanks for your quick response Mark. Your answers are pretty much what I have figured and have been flirting with your 2)idea. Having different expiration dates would allow me to reduce my size over seperate months, so long as I can put them on at optimal times to capture the benefits of both months theta. The other aspect is the strike selection, usually I don’t like to crowd the strikes too much in case I choose to roll as an adjustment. Overall though it seems to look more attractive to me to have all my trades on the one vehicle.
    Thanks for the feedback.