Risk ManagementConcrete Rules for Success
The most important rules professional traders follow. Protect your capital and maximize long-term profits.
8 Golden Rules of Risk Management
These rules are followed by professional traders worldwide. Memorize them.
The 1-2% Rule
Never risk more than 1-2% of your total capital per trade.
Max Risk = Portfolio × 0.01 (or 0.02)The 5% Portfolio Rule
Maximum 5% of portfolio in a single position (underlying).
Max Position = Portfolio × 0.05The 25% Cash Rule
Keep at least 25% of portfolio as cash reserve.
Min Cash = Portfolio × 0.25The 50% Profit Rule
Close winners at 50% of maximum profit.
Exit = Entry Credit × 0.50The 200% Loss Rule
Close losers at 200% of received credit (for credit spreads).
Stop Loss = Entry Credit × 2The 45 DTE Rule
Open trades with 30-45 days to expiration (optimal for theta).
DTE = 30-45 daysThe 21 DTE Exit Rule
Close or roll positions at 21 DTE (gamma risk increases).
Exit/Roll at DTE ≤ 21The Delta-16 Rule
Sell options with delta ~0.16 (1 standard deviation, ~84% probability of profit).
Sell Strike at Δ ≈ 0.16Position Sizing Quick Reference
Quick Calculator
| Portfolio | 1% Risk | 2% Risk | 5% Position | 25% Cash |
|---|---|---|---|---|
| €10,000 | €100 | €200 | €500 | €2,500 |
| €25,000 | €250 | €500 | €1,250 | €6,250 |
| €50,000 | €500 | €1,000 | €2,500 | €12,500 |
| €100,000 | €1,000 | €2,000 | €5,000 | €25,000 |
Position Sizing Methods
Fixed Percentage
Simplest method: Fixed percentage of portfolio per trade.
Position = Portfolio × Risk%- Easy to calculate
- Consistent
- Ignores win probability
Kelly Criterion
Mathematically optimal position size based on edge and win probability.
Kelly% = (W × B - L) / B- Maximizes long-term growth
- Mathematically sound
- Volatile
- Often too aggressive (Half-Kelly recommended)
Volatility-Based
Position size adjusted to underlying volatility.
Position = (Portfolio × Risk%) / (ATR × Multiplier)- Considers market conditions
- Risk-adjusted
- More complex to calculate
Optimal Portfolio Allocation
Conservative
For beginners and capital-preserving traders
Moderate
For experienced traders with stable income
Greeks-Based Risk Management
Directional Risk
How much does option price change per $1 move?
Delta Change Rate
How fast does delta change? Increases exponentially near expiration.
Time Decay
How much does option lose per day? Your friend as a seller.
Volatility Risk
How does position react to IV changes?
Pre-Trade Risk Checklist
Put the Rules into Practice
Test your risk management skills risk-free with paper trading.