The journal's position sizing rule is mechanical: no single position may risk more than 2% of NLV. The position's size is calculated from the structure's max-loss and the 2% rule, and the rule is applied to every position without exception.
The rule
Position size (contracts) = (2% × NLV) / (structure max-loss per contract).
A $100,000 NLV and a bull put spread with a $400 max-loss per contract gives 5 contracts: (0.02 × 100,000) / 400 = 5. The position risks $2,000 — exactly 2% of NLV.
The rule uses the structure's max-loss, not the premium paid or collected. Defined-risk structures have a known max-loss at entry, and the sizing is built on that known quantity.
Why mechanical
Discretionary sizing is where most trading methodologies fail. The trader sizes up after wins (overconfidence) and sizes down after losses (fear), which inverts the correct response to variance. A mechanical rule removes the trader's emotional state from the sizing decision.
The 2% rule is also what makes the portfolio's risk additive. With every position capped at 2% of NLV, the portfolio's total risk is bounded by the number of positions times 2% — a quantity the risk management rules control directly.
The exceptions
There are two documented exceptions:
1. Pre-event premium selling. Positions opened before a known event (FOMC, CPI) are sized to 1% of NLV rather than 2%, because the move risk around the event is higher than usual. The smaller size compensates for the fatter tail.
2. Correlated positions. When two positions share a directional exposure (e.g., two bullish structures on SPX), the combined position is sized as one for the purposes of the 2% rule. Correlation is treated as concentration.
Both exceptions are documented in the trade log entry. An undocumented exception is a violation of the SOP.
Sizing and the Kelly criterion
The 2% rule is conservative relative to the Kelly criterion for the journal's typical edge. The journal's view is that the Kelly criterion assumes the edge is known precisely and the outcomes are independent — neither of which holds exactly. The 2% rule is a fractional-Kelly sizing that leaves a margin of safety for the uncertainty in the edge estimate.
What sizing doesn't do
Sizing doesn't turn a negative-expected-value trade into a positive one. The sizing rule controls the variance of the outcomes, not their expectation. A bad trade sized at 2% is still a bad trade — it just can't do as much damage.
About this article
Editor: Dependability Research Desk. The desk has tracked options, index-derivative structure, and daily U.S. equity markets since 2017, with a working book in SPX/XSP index options and a public trade log that records every entry, adjustment, and close.
Editorial process: Each forecast distils overnight data and primary sources (Cboe option chains, Federal Reserve releases, Treasury auctions, FRED historicals) into the worked-example frame: what the tape is saying, the mechanism behind the move, what to do this week. Forecasts are reviewed against the live close on the next publication; the track record is self-auditing on the forecasts page.
Corrections policy: When an article gets a fact wrong (wrong strike, wrong P&L, wrong expected-move calculation), we correct it inline and append a dated correction note at the top of the affected page.
Disclosure
The desk may hold the positions, options, or underlyings mentioned in a trade-log entry at the time of publication; positions are disclosed in the trade-log entry itself. Nothing on this site is investment advice.
Disclaimer. This content is published for informational and educational purposes only. Nothing here is investment advice. Trading options involves substantial risk of loss and is not appropriate for every investor. Past performance, including the journal entries on this site, does not guarantee future results. You are solely responsible for your trading decisions.