How to size positions like a trader who plans to survive.

Position sizing is the math that decides whether you survive a losing streak or get carried out by it. The strategy gets the credit when it works. The position size gets the blame when it does not. Most retail accounts blow up not because the strategy failed, but because the sizing during the strategy's losing streak was too aggressive to survive.

This post is the math. Then the common mistakes. Then what changes once you trade options instead of stock.

The formula

Example. You risk $250 on a trade. Your entry is at $50.00. Your stop is at $49.00. Distance is $1 per share. Position size is $250 divided by $1, which equals 250 shares.

Another example. You risk $250 on a trade. Entry is at $200. Stop is at $194 (a $6 distance). Position size is $250 divided by $6, which equals 41 shares. The wider stop forces a smaller position to keep the dollar risk the same.

That is the entire formula. You decide the dollar risk first. You set the stop based on where the chart says the trade is wrong. The position size falls out of those two inputs. You do not pick the position size first and back into the rest.

Why retail traders do this backwards

The common pattern is the opposite of the formula above. The trader picks the position size first ("I want to buy a hundred shares"), then sets a stop based on whatever the chart looks like, then notices that the dollar risk is now $500 when their plan said $250. Instead of cutting the position in half, they widen the stop to $1 per share so the trade can hold a hundred shares. Now the stop is in the wrong place, the position is twice the planned risk, and the trader has rationalized both decisions.

The formula prevents this. Risk first. Stop second. Size last.

Fixed fractional sizing, the survivable default

The simplest survivable sizing method is called fixed fractional. You risk a fixed percentage of account equity per trade, recalculated as the account grows or shrinks. One percent is conservative. Two percent is the upper bound of safe. Three percent and up is fragile through losing streaks.

The math: a one percent risk per trade trader on a $25,000 account risks $250 per trade. After a losing streak takes the account to $20,000, that same one percent now means $200 per trade. The dollar risk scaled down with the account, which is the property that prevents the death spiral.

The opposite is fixed dollar sizing. Trader risks $500 per trade regardless of account size. On a $25,000 account that is two percent. On a $10,000 account (after losses) that is five percent. The dollar risk did not adjust to the new account size, and now the trader is running fragile sizing without realizing it. The next bad streak ends the account.

Options sizing, what changes

For long options (long calls or long puts), max risk per contract is the premium paid. If a contract costs $200 and you buy two, max risk is $400 regardless of how the underlying moves. Position size in contracts equals dollar risk divided by premium per contract.

For short options or spreads, max risk is the defined loss of the position. A bull put spread that pays $50 in credit with a $5 wide spread risks $450 to make $50. Position size depends on the $450 number, not the $50 credit. The trader who thinks of the trade as "earning $50" instead of "risking $450" is sizing on the wrong number.

For 0DTE, the sizing math is the same but the time pressure is brutal. A 0DTE option can lose fifty percent in fifteen minutes. The position size needs to be the size you are willing to lose entirely. Treat the entire premium as the risk amount, period.

The Kelly criterion, briefly

Kelly is a formula from probability theory that calculates the optimal bet size given a known edge. The version most often quoted is: f = (bp - q) / b, where f is the fraction of capital to bet, p is the probability of winning, q is one minus p, and b is the ratio of win to loss size.

In trading, the formula is more theoretical than practical because you do not know your true edge with the precision Kelly requires. Most traders who use Kelly use a fractional version, often a quarter or a half of full Kelly. Quarter Kelly captures roughly seventy five percent of the compounding benefit while reducing drawdown variance to survivable levels.

For most retail traders, fixed fractional at one to two percent achieves a similar result without the math headache. Use Kelly when you have a known edge measured over hundreds of trades. Use fixed fractional when you do not yet.

The two sizing mistakes that end careers

Sizing up after wins.

The trader has a good week. Confidence rises. The plan said one percent, the trader trades one and a half percent on Monday "because the setup looks really clean." Monday loses. Tuesday the trader sizes back up to two percent to recover. Tuesday also loses. By Thursday the account is below where it was before the good week. The fixed fractional rule already scales position size up as the account grows. Manual size ups are discretionary overrides. Discretionary overrides on the upside lose money on average.

Sizing up to revenge a loss.

The trader takes a loss. Now they want to make it back fast. The next trade size is two times the original. The next trade loses too because the brain that is revenge sizing is not the brain that picks good setups. The fixed fractional rule says smaller size, not bigger, after losses. Most traders do the opposite.

Where the audit fits

The Trader's Plan Audit writes your position sizing formula into the document with your numbers. Your risk per trade in dollars. Your account size as of the intake date. The formula above written out so you do the math before every click. Five to seven pages, your numbers, in your own words.