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Best PracticesTrading Too Big | Apr 4, 2016
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    Best PracticesTrading Too BigApr 4, 2016

    A major part of the tastytrade philosophy in selling options is to take advantage of high implied volatility (IV) and high implied volatility rank (IVR) over a large number of occurrences. The biggest problem many face when starting out trading is sizing positions too big.

    Outlier moves can and do occur, and if too much capital was allocated to a losing trade, the portfolio implications are disastrous. By trading many different and non-correlated underlyings our probability of profit (POP) increases.

    A trader with a $50K account may think that selling short 5 SPY Strangles in the same duration and strikes is not a big trade. Should the trade go wrong, it can cripple the portfolio's performance. The buying power reduction on the trade would be about $15K or 30% of the account. That means if the trade is an outlier and a big loser, the loss could be equal to that BPR or worse. This would leave the trader in a position that requires a lot of successful trades without losing and large returns on capital (ROC) to get back to even.

    Risk is subjective and a position that is too big depends upon your account size. Tom and Tony provided some ballpark percentage figures to use for both defined and undefined risk trades. They also provided guidance regarding trading futures.

    For more on the importance of a large number of occurrences see:

    Watch this segment of “Best Practices” with Tom Sosnoff and Tony Battista for the important takeaways and a better understanding of what we mean when we say “trade small, trade often."

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