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Summary

Position sizing is the first line of defense in an options-selling business: the question is never "how many contracts" but "how many dollars of maximum loss does this structure expose me to?" TOMIC frames sizing around two money-management rules — a per-trade risk cap and a monthly loss circuit breaker — applied to a diversified book of defined-risk trades.1 This page distills the sizing logic; the full money-management material lives in the TOMIC risk-management and trading-plan topics.

Risk-Per-Trade Rules

TOMIC's canonical limits for a small account (TOMIC 1.0, $100K):2

Rule Limit Purpose
Max loss per trade 2% of capital ($2,000) Prevent the "shark bite" — one trade cannot meaningfully damage the business
Max monthly loss 6% (go flat for the month) Prevent "piranha attacks" — sequences of small losses compounding into a bad month
Sector concentration ≤ 20–25% per sector Sizing is only safe if positions are diversified1
Trade duration < 90 days Keeps theta engine rolling and risk re-underwritten regularly2

A practical refinement: set the allowed loss below max margin (TOMIC suggests ~20% of margin as the stop budget), so the exit trigger arrives before margin forces it.1

Size the Structure, Not the Contract Count

The unit of sizing is max loss of the structure, not contracts:

  • A defined-risk trade (iron condor, vertical, fly) has a known worst case at entry — divide the per-trade risk budget by that max loss to get size. 10 iron condors risking $150 each ≈ 1 iron condor risking $1,500; they are the same risk decision, but the second requires one re-underwrite instead of ten.
  • Undefined positions break this arithmetic: naked calls and short upside ratio legs are unbounded; naked puts are bounded-but-severe (worst case is strike minus premium, per 100-share contract — real but rarely survivable at size). None are defined-risk at entry, so none can be sized by a max-loss formula — size them by stress scenarios, not contract count — and keep them out of a theta-selling business until risk capital and process are professional-grade.1
  • Under margin-based sizing (Reg-T) two structures with identical margin can carry very different max losses; under portfolio margin the liberation is larger still — see VaR and Margin for why beginners should stay on Reg-T until portfolio-level risk is understood.3

Aggregate Portfolio Heat

Individual 2% caps do not bound the book. Portfolio heat — the sum of max losses (or current unrealized risk) across open positions — is the aggregate gauge:

  • If every trade sits at its 2% cap and ten positions are open, total risk is 20% of capital before correlation effects; in a crash, correlated short-vol positions lose together (see Diversification and Correlation).
  • TOMIC's answer is layered: per-trade cap + monthly stop + sector caps + diversification across underlyings, strategies, and expirations.1 2
  • The third-third-third adjustment rule interacts with heat: adjustments trigger at 1/3 and 2/3 of max loss, and full exit at the cap — so realized per-trade losses are usually well below the sizing cap, but heat must still be measured at the cap, not the expectation.1

Sizing Checklist

  1. Compute max loss of the structure at entry (defined-risk only).
  2. Divide the per-trade budget (2%) by that max loss → position size.
  3. Check sector concentration and correlation with existing book.
  4. Add the trade's max loss to portfolio heat; skip the trade if heat is already elevated.
  5. Re-measure heat after adjustments — rolling often increases risk rather than reducing it.1

Links

Source Notes

  1. TOMIC bundle, topic Risk Management. ↩↩↩↩↩↩↩

  2. TOMIC bundle, topic Trading Plan. ↩↩↩

  3. TOMIC bundle, topic Trading Infrastructure. ↩