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Size Matters least in options trading. In this post we want to talk about two issues: the size of gains/losses and position sizing. Like most things with selling options, nothing is quite as it seems. We are in a counterintuitive world doing something that very few people are willing to do. This is why we win.

Part 1: your 2% winners are big market-beaters.

Marc and Laura, what the heck is that thing we are looking at?

That, our friends, is the world's tallest Lego tower. In 2015, a group of more than 18,000 Italians built a tower over 35 meters high made out hundreds of thousands of teeny tiny lego bricks.

Like this (actual size):

Now hold that thought.

Today we had two trades close out for two more winners. Yay us! We are now 49-0 in 2021! The SAVA trade we opened on February 3 gained a whopping 2.63%. And the AVXL trade we entered on February 5 for a shiny quarter -- yep, $0.25 of premium -- closed today for a shiny dime, and we made a gain of 2.07%.

"Guys," you ask. "Why are we messing around with quarters, dimes, and a measly 2%?"

Because 2% is a lot. You now why?

Because we have LOTS of Lego bricks.

Here's the key: the SAVA trade was only 5 days long. There are 365 days in a year. That means we can make that trade 73 times a year. Let's say 40 times to be conservative. I mean, we're not always at the trading terminal, right? 40 x 2.6% is 104%.

"Well, shoot," you might say. "104% in one year is pretty good." You betcha.

That AVXL trade where we got a quarter for the price of a dime? That was a 3 day trade. 365 days in a year divided by 3 days per trade is a BIG number. It's more than 121. But let's say we only do the AVXL trade once a week. That's 52 times a year.

Geez, 52 times 2% is 104% again.

See where we're going here?

It's weird selling options. It just doesn't feel like you're making a lot of money. Say you get that text from your buddy Jay who is an expert stock picker and his latest SPAC just popped 75% today. Don't you feel like a dummy starting at your 2% wins?


Jay's SPAC's don't pop every week, but your 2% comes in on the regular. Maybe not every week, but every month? 2% x 12 months is 24% a year. Would you be happy with that? We sure would. I bet Jay would, too.

The point of this is that we make a lot of short trades, and they add up to one tall Italian Lego tower. In 2021, we've made 49 trades with an average duration of only 8.2 days and an average gain of 4.96%. We can do the same calculation that we did for SAVA and AVXL: 365 days divided by 8.2 days per trade is 44.5 trades per year. Let's be conservative and say 30 trades per year. At 4.96% per trade, that's an annualized return of over 148%.

Seriously, 148% in a year? Math doesn't lie. That's our current run rate. It's probably better than Jay's doing, and he's doing pretty good.

We do better, one brick at a time.

Part 2: position size.

We have gotten questions from our subscribers asking how much to invest in each trade. We recommend investing the same amount of money in each trade. This is called "position size." You have to calculate the right number of contracts for each trade depending on the strike price and premium. But don't worry, it's easy.

Many will tell you that position size is part art, part science. Nonsense. Position size is one calculation on your calculator: How many trades do you want open at once? We recommend at least 10. Now take the total amount of money you have to trade and divide by 10. That's your position size.

Example: you have $100,000 dollars to trade. You want 10 positions at a time. So you invest $10,000 in each trade.

Done. See how easy?

If you want 20 positions at a time, put $5,000 in each trade.

How many positions you have doesn't really matter so long as you have more than 10. In our experience, 10 positions is sufficiently diverse that you would won't be overexposed in any one company.

(That doesn't mean you have 10 Gamestop trades at the same time. You want 10 or more different your portfolio at any given time.)

"But guys," you ask. "How do we place an order so we hit our position size?"

Here's how to do it for covered calls and cash-secured puts:

Position sizing a covered call: When you buy the stock for $20 and sell a call for $5, your "Net Debit" is $15 per share, or $1500 per contract. You want to buy enough covered calls to get close to your position size. If your position size is $5000, then buy three covered calls. If it's $10,000, buy seven. Close enough is good enough.

Position sizing a cash-secured put. It's a little more complicated. When you sell a put with a strike of $15 and a premium of $3, your broker will set aside cash to "secure" the put. In this case, they will reserve $15 per share, or $1500 per contract, That's because you might have to buy the stock at $15 per share if the option ends up in the money and it is assigned. So, if your position size is $5000, then you sell three of these puts. If your position size is $10,000, sell seven of them.

If you have any questions, just email us! We are always available and happy to help.

Good luck and happy trading! We look forward to tomorrow signals.

Marc and Laura


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