Do you make decisions based on the number of contracts or a specific dollar amount to invest ?

As in a spread? That's a different view than a naked option.

 

My original question was how do you determine 5% risk on a naked option. Not on a spread.

 

It is always good to limit the risk around 2% of overall trading capital in each trade you take. Number of contracts should be adjusted around within this percentage itself. This rule will protect when you are on the wrong side. Test your plan and trade the plan including money managment techniques

 

Like you said, a naked option has theoretically unlimited loss potential on a gap. You can place a stop loss to limit risk, but if it gaps, you're boned.

A stop loss or a spread are both designed to mitigate risk. I'd say with a spread you are at least still in the trade if it recovers.

I am not an expert but I can't think of a way to properly limit your risk on a naked option besides...not making it naked.

 

Sure. But it was more a rethorical question than anything else.

 

Ah, I see. I had just skimmed ¯\_(ツ)_/¯