Position Sizing

Discussion in 'Options' started by candeo, Nov 15, 2006.

  1. candeo


    Is there a software out there that calculates position size depending on risk.
    I would enter:

    - The amount I want to risk.
    - Where my stop on the underlying is
    - Maybe where my target point is and when

    Depending on the greeks, the software would tell which options to buy and how many.
    I have been trading options for a long time now, and I have noticed many times that I could be wrong on a stock that goes 5% against me and lose twice what I make on a stock going 5% my way, with the same investment. I understand that I should look at the greeks, but I wonder if there are some tools out there that would do some of the work for me.
  2. MTE


    Yeah, it's called an option pricing model.

    If you've been trading options for a long time now and still have no idea how to size your positions then you definitely should stop trading them. And what's with "I understand I should look at the greeks, but...."? :confused: If you trade options you should've done that a long time ago, mate!
  3. MTE

    A bit harsh. Not like you. Bad day ?
  4. candeo


    I really don't need the attitude, I just asked a question. Of course I have been considering the greeks on all trades I enter. What am I asking is if there is a software that would automate this and calculate the optimal position size. You answered that it was called an 'options pricing" software, but you did not read my question. I don't need to price the options, I need to calculate the position size for optimal risk management. If, like you say, you know one software that does that, just tell me the name. If not, I don't need your comments like "you should not be trading options". I am doing just fine.
  5. MTE


    If you have the amount you want to risk, your stop on the underlying and your profit target then it is just a matter of plugging in those values into an option pricing model and finding out your risk and reward at those exit points. Repeat the process for various options and choose the best alternative. There isn't all that many alternatives if you know how options work and what you want to achieve.

    P.S.: I guess it was a bit harsh, sorry, tough day.
  6. candeo


    What "options pricing model" do you recommend that would take "risk" as an entry and calculate position size? Thank you. I am already using pricing models to find the options I want to buy depending on delta, IV etc. but I need something that would automate this research especially for when I need to make a quick decision.
  7. MTE


    You can calculate how much an option would be worth if the stock hits your stop loss. Then you divide the amount you're willing to risk by how much you would lose per option.

    I don't think any software actually automates this, but you could build one in excel using Hoadley's tools, for example.
  8. candeo


    I looked at these tools before, but did not find anything more than TOS in there. But you are right, maybe I should just use them to create my own spreadsheet. I was just wondering if there was a program already on the market that does this. With these tools, do you get real-time data?
  9. MTE


    Well, you mentioned TOS, and I assume you meant Thinkorswim. If you did then TOS has a DDE link to excel so you can have real time quotes in Excel, combine that with Hoadley's pricing functions for excel and you got what you want.

    edit: You can probaly get by without Hoadley's tools all together if you don't mind using Greeks to estimate your risk/pricing. Just export all the greeks and prices and then manipulate the data to get what you need.
  10. Candeo

    Have a look at Standard Deviation.

    Then study VAR (value at risk). Personally, I risk no more than 10% (daily) of my trading capital with 95% confidence. Optimum risk levels are subjective, and I wouldn't argue that maybe I have it wrong. But at least I specify and quantify risk.

    From your posts I suspect you have studying to do, but then don't we all !
    #10     Nov 15, 2006