Position sizing controls the risk of individual trades. Risk management controls the risk of the portfolio. The journal's risk management rules limit the portfolio's total exposure, the correlation between positions, the concentration in any single underlying, and the maximum drawdown.
Total exposure
The portfolio's total risk — the sum of every open position's max-loss — may not exceed 12% of NLV. With the 2% per-position rule, this caps the portfolio at six full-sized positions (fewer, in practice, once correlation is accounted for).
The exposure cap is checked before every new trade. A trade that would push total exposure above 12% is not opened, regardless of its expected value.
Correlation
Positions on the same underlying in the same direction are treated as one position for sizing purposes. The journal's correlation rules:
- No more than 6% of NLV at risk on a single underlying (three full-sized positions' worth of correlated exposure, sized as one).
- No more than 8% of NLV at risk on a single broad-market factor (e.g., all equity-index positions combined).
These are the rules referenced in the statistical foundation: the portfolio's variance is the sum of individual variances plus pairwise covariances, and the correlation caps are how the journal keeps the covariance term bounded.
Concentration
Beyond the correlation caps, no single expiration may contain more than 8% of NLV at risk. Expiration-day gamma is the portfolio's sharpest tail risk, and the expiration concentration rule keeps any single expiry from dominating the book.
Drawdown limits
- 6% monthly drawdown: if the portfolio loses 6% of NLV in a calendar month, all new entries stop for the rest of the month. Open positions are managed to their exits but not replaced.
- 12% peak-to-trough drawdown: if the portfolio draws down 12% from its high-water mark, the journal halves all position sizes (1% rule) until the drawdown recovers to 6%.
The drawdown rules are circuit breakers, not predictions. They assume that a large drawdown may signal a regime the playbook wasn't built for, and they buy time to find out.
Event risk
No new positions are opened in the 24 hours before a scheduled market-moving event (FOMC decision, CPI print, major earnings for single-name underlyings) unless the position is explicitly structured for the event and sized at the 1% pre-event exception.
The hierarchy
When rules conflict, the hierarchy is: drawdown limits > exposure cap > correlation caps > position sizing > structure selection. A trade that passes structure selection but breaches the exposure cap is not opened. Risk rules outrank edge estimates, always.
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.