Option position sizing: funding, stress loss and maximum loss
Size options using both contractual loss and explicit stress scenarios. Check funding, concentration and simultaneous portfolio losses.
By OptionsKing. Publisher and editorial methods.
What you will learn
By the end of this lesson, you should be able to:
- Calculate per-contract and portfolio stress losses.
- Distinguish maximum loss from a chosen scenario.
- Combine risk limits with cash capacity.
Translate the account's loss budget into contracts before comparing premiums. The six-position example contrasts a maximum-loss limit, an allocation limit and a chosen stress loss. Each answers a different question; none alone establishes that the account can tolerate every outcome.
The account this cluster follows
$50,000 in a cash account. Six names, one contract each, cash-secured puts sold about 0.22 delta with 46 days to run.
| Ticker | Sector | Stock | Put strike | Credit | Cash secured | Share of the account |
|---|---|---|---|---|---|---|
| AMD | Semiconductors | $118.00 | $106 | $252 | $10,600 | 21.2% |
| MU | Semiconductors | $92.00 | $83 | $177 | $8,300 | 16.6% |
| INTC | Semiconductors | $23.40 | $21.50 | $46 | $2,150 | 4.3% |
| KMI | Energy | $27.60 | $26 | $35 | $2,600 | 5.2% |
| T | Telecom | $22.50 | $21 | $20 | $2,100 | 4.2% |
| WBD | Media | $11.40 | $10.50 | $16 | $1,050 | 2.1% |
| Total | 6 names | $546 | $26,800 | 53.6% |
The book reserves $26,800 and leaves $23,200 uncommitted. Those cash totals establish funding capacity, not safety. Compare three illustrative rules to see which exposure each constrains.
Rule A: no position may lose more than 2 percent of the account
First define what the 2 percent means. A planned stop loss and a contractual maximum loss are different quantities. A stock or option stop may execute beyond its trigger after a gap; it cannot guarantee a 2 percent realized loss limit.
A closing stop order can be placed on a short put, but gaps and liquidity prevent it from guaranteeing a loss cap. You are contractually obliged to buy at the strike, so the maximum loss is the strike times 100 less the credit, reached if the company goes to zero.
| Ticker | Max loss, one contract | A: max loss under $1,000 | B: secured cash under $5,000 | C: loss on a 25% decline under $2,500 |
|---|---|---|---|---|
| AMD | $10,348 | 0 | 0 | 1 |
| MU | $8,123 | 0 | 0 | 2 |
| INTC | $2,104 | 0 | 2 | 7 |
| KMI | $2,565 | 0 | 1 | 5 |
| T | $2,080 | 0 | 2 | 6 |
| WBD | $1,034 | 0 | 4 | 13 |
All six contracts in this table exceed the $1,000 maximum-loss budget, so rule A permits none of them. That is a valid outcome. It does not mean every cash-secured put is excluded: a smaller strike obligation could fit, depending on its credit and contract terms.
If maximum loss is your chosen hard limit, keep it. Do not substitute a milder scenario simply to admit a preferred trade. Another structure may change the payoff, but brings its own costs, exercise exposure and approval requirements.
Rule B: no position may tie up more than 10 percent of the account
This allocation policy limits each position to $5,000 of secured cash on a $50,000 account. It is a chosen concentration limit, not a universal broker rule. Use a position size calculation to translate a specified limit into whole contracts.
Note what it does to the two expensive names. AMD needs $10,600 of collateral and MU $8,300, so rule B says you cannot sell either. The book above breaks its own rule twice before the first cycle ends.
Standard 100-share contracts create a sizing constraint: a $120 strike requires $12,000 of gross purchase funding for one put. A lower-priced stock may fit the allocation, but affordability is not evidence of investment quality. Skipping a trade is a valid choice.
Rule C: no position may lose more than 5 percent of the account on a 25 percent decline
This rule asks about one defined adverse scenario rather than the contractual maximum. It supplements the other limits; it does not replace them or establish how likely that decline is.
Take AMD. Stock $118, short the $106 put, $252 credit. A 25 percent decline puts the stock at $88.50. You get assigned at $106, the shares are worth $88.50, and the loss is $1,498 after the credit. Against a $2,500 limit, one contract fits and two do not.
Across the opening book, a simultaneous 25 percent decline in all six names gives a modeled expiration loss of $4,136, or 8.3 percent of the account. Decide whether that loss is tolerable, then test deeper declines, gaps and poor exits. Passing one scenario does not establish survivability.
Compare it to the same book's theoretical maximum loss: $26,254, or 52.5 percent. Both numbers are useful: one measures a chosen stress and the other the contractual extreme.
Compare the stress with the illustrative ledger
Cycle 3. AMD fell 23.8 percent in 46 days, MU 23.5 percent, INTC 21.0 percent, WBD 15.3 percent, KMI 6.8 percent. Five of the six positions were assigned in the same six weeks and the paper loss across them was $2,902.
The $4,136 stress result and $2,902 ledger loss come from different price paths. Their relative size does not validate the stress as a forecast. Recalculate using the actual positions and prices at each decision rather than treating the opening scenario as permanent protection.
Rule A sets a maximum-loss budget; it does not predict that every stock reaches zero. Rule B limits single-position funding; it does not measure simultaneous losses or guarantee legal or broker eligibility. Shared exposures require a portfolio-level check.
Write a policy that combines the constraints
The 25 percent decline and 5/15 percent limits are illustrative policy choices, not validated safe levels. A worse gap can exceed the scenario. Retain the maximum-loss calculation and test a deeper decline alongside the funding and concentration limits.
A complete policy should state each constraint separately.
- Funding: enough eligible cash for all purchase obligations you may need to meet.
- Per-position loss: both the contractual maximum and selected stress losses must fit your stated limits.
- Portfolio stress: test simultaneous declines and common events across positions, including shares already held.
- Concentration and reserves: limit ticker and sector exposure and specify what cash must remain available.
The opening book is cash-funded but fails the illustrated 2 percent maximum-loss limit and the 10 percent allocation limit on some names. Passing the chosen stress test does not override those failures. Define which limits are binding before you trade, and review decisions without hindsight when the account changes.
Check your understanding
Does passing a 25 percent-decline stress test cap losses at that result?
Show the explanation
No. It describes only that scenario. A greater decline, correlated losses, changing volatility or poor execution can produce worse results. The contractual maximum and available funding still matter.
Common questions
How many option contracts should I sell at once?
Set limits for maximum loss, scenario loss, concentration, and reserves using your account constraints. The lesson's 25% decline and 5%/15% limits are illustrative assumptions, not universally safe levels.
Does the 2 percent risk rule work for selling puts?
A maximum-loss budget can be applied to puts; it may exclude trades whose lot sizes are too large. A stop order can be placed but cannot guarantee its price through a gap. Stress sizing complements rather than replaces maximum-loss awareness.
What is the maximum loss on a cash-secured put?
Strike x 100 minus premium before costs, reached if the stock goes to zero. Maximum loss and plausible stress loss answer different planning questions; neither should be ignored.
Why do small accounts end up selling puts on cheap stocks?
Standard contracts usually cover 100 shares, so higher strikes create larger purchase obligations. A $120 strike requires $12,000 gross funding, regardless of the small quoted premium. Lower-priced shares may fit a limit but still require an investment and risk assessment.
Sources
Rules and thresholds above were checked against these documents on August 4, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.
Keep reading
Do the math on your own trade
Every price in this article is an illustrative worked example, not a quote. Read Running the book for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.