Put Path Part 6 (Size Matters): How to Choose the Lot Quantity

What quantity should you trade? This is a great question. Some people think only 50% of your available capital should be allocated toward credit spreads. To me this is a personal choice. Of course, the more you risk the more you can potentially lose. Do not ever risk more money than you are willing to lose (same rule as when you gamble). But also, “you have to risk it to make the biscuit”. For the Put Paradise pages “The Scoreboard”, I am using a predefined capital limit to represent the annual rate of return, which assumes you are 100% invested in that account. For example, I was using an account size of $36,400-$40,000 in a Robinhood options trading account. Because we are using a $5 wide credit spread (and each $1.00 option equates to 100 shares) our capital needed is < $500 for each put credit spread. We are also trading 12 names weekly, so we need a minimum of $6,000 for each week’s put credit spreads. It’s actually a little less than $6,000 (because you subtract out the credit received from the Buying Power Reduction), but to keep the math simple, it’s roughly $6,000 per lot (it’s actually more like $5,600) each week. Therefore, with < $24,000 of capital, you can trade 1 lots each week for each underlying. That is due to the math as follows: 4 weeks x 12 underlyings x $500 per lot x 1 lots <= $24,000. If you have more capital, you can scale up from there to 2 lots and beyond.

So, for your lot sizing roughly you would just divide your buying power (capital) by $24,000 to get your lot size. For example, if you are risking $72,000, you can trade in 3 lots. Again, the minimum amount of money needed to get the full benefits of the Put Path Options System is $24,000, which will allow you to trade in 1 lots in the ladder structure we have set up and be able to trade all underlyings. If you only have $2,000, then you can trade only one name, which I recommend would be QQQ. Feel free to trade in larger lots if you have more capital. For example, if you have $240,000 you can trade 10 lots, and potentially gain around $120,000 per year. This system is very flexible and scalable, and there is technically no upper limit to trading lot size if a market is liquid enough. I recommend scaling up your trading size gradually as you gain more experience and you have enough to trade all 12 names in order to get the diversification benefits. In other words, don’t scale up in just one underlying as that concentrates your risk. It’s better to spread your trades into 12 underlyings using a 1 lot versus trading 1 underlying (like QQQ) in a 12 lot. Make sure you spread your risk around by using all 12 underlyings. Please, always remember that you can theoretically lose all of what you are currently risking if the market has a black swan event that we can’t trade out of (more on that in Step 7).