Position Sizing for the Wheel

Why Position Sizing Is the #1 Risk Lever

I see it all the time in trading forums -- people obsessing over .20 vs .25 delta or 30 vs 45 DTE, but completely ignoring the thing that actually determines whether a bad trade is survivable or catastrophic: how much money they put into a single position. Bad sizing turns a normal assignment into an account-ending disaster. This is the most important lesson in the whole course.

The Blow-Up Pattern

I watched a guy in a Discord sell 10 CSPs on a single $50 stock -- that's $50,000 tied up in a $100k account. Stock dropped 30%. Suddenly that one position was 70% of his portfolio, and he had zero cash to do anything about it. He couldn't sell puts elsewhere, couldn't average down, couldn't roll. Account was done. It wasn't a bad strike or bad delta. It was terrible sizing.

The 2-5% Rule for Cash-Secured Puts

My rule: never risk more than 2-5% of your total portfolio on any single position's maximum loss. For a CSP, max loss is (strike x 100) minus the premium. In practice, that means your secured capital per position tops out at 20-30% of your portfolio. Yes, true max-loss (stock goes to zero) is rare on quality names like AAPL or MSFT. But 30-40% drops happen, and you need to survive them.

Max Contracts per Position

Contracts = floor( (Portfolio x Max_Allocation%) / (Strike x 100) )

Sizing Example: $100k Portfolio

Say you want to sell CSPs on AAPL at the $170 strike. Capital per contract = $17,000. With a $100k account at 20% max allocation, you can commit $20,000 -- that's 1 contract. At 25%, still 1 contract ($17k is under the $25k cap). Never, ever sell 3 contracts here -- that's $51,000, over half your account on a single name. I don't care how much you love AAPL.

Portfolio-Level Caps

Beyond per-position limits, I cap my total committed capital across all open CSPs at 60-80% of the portfolio. The remaining 20-40% stays in cash or short-term treasuries. That reserve is your ammunition during sell-offs -- it's what lets you sell puts when premiums spike while everyone else is panicking and being forced to liquidate. This reserve is the difference between surviving a crash and being wiped out.

Per-position: 2-5% max risk, 15-25% max capital commitment
Per-sector: no more than 30-40% of total portfolio in one sector
Total committed: 60-80% of portfolio across all positions
Cash reserve: 20-40% always available for opportunities or defense

The short version

•Position sizing -- not strike selection -- is what determines whether you survive drawdowns. Full stop.
•My limits: 2-5% max risk per position, 15-25% max capital commitment. No exceptions, no matter how good the setup looks.
•Always keep 20-40% in cash. Always. That reserve is what separates surviving traders from blown-up accounts.

Quick Check

1/3

You have a $200k portfolio and want to sell CSPs on a stock with a $80 strike. Using a 20% max allocation, how many contracts can you sell?

← Module Overview When to Roll vs Take Assignment →