The most frequent question we get from new subscribers is, “I have $xxxx…how much of it should I allocate to your strategy?” Our newsletters are educational publications, not investment advisories, so I can’t tell any member how much to put into this or that strategy or position—but there are some guidelines you can use to help decide what’s right for you.
First and foremost, never risk more than you can afford to lose. And by “risk” here, I mean the worst-case risk of a 100% loss. No, it isn’t likely that Calendar Options, or even an individual position, will ever take a 100% loss in a month—but crashes, though very rare, do happen, and no market-neutral strategy is bulletproof if the market drops 20% in a week (or less); extreme rallies can be damaging as well.
Step two, after deciding on your total amount of risk capital, is to allocate it among several different strategies. Because options are highly leveraged, I don’t put more than half of my risk capital into all my options strategies combined (not including relatively low-risk, stock-centered strategies such as covered calls, married puts and collars). Of course, your risk-tolerance may vary,…but I know one trader who was doing so well in the last bull market that he convinced himself to throw the bulk of his capital into options, and he was hurt very badly indeed once market conditions changed. That’s an extreme example, because his portfolio consisted entirely of speculative long positions; nevertheless, I use it to make the point that leverage magnifies the risk of trading options, and that’s important to consider when deciding how much capital to allocate to any options strategy.
So, let’s say you’ve determined your total amount of risk capital and how much of it you want in options. The next step is to apportion it to several different options strategies—iron condors, calendar spreads, double-diagonals, butterflies, maybe a long straddle if you’re experienced with gamma-scalping,…and yes, even some speculative directional and volatility plays, if you like that kind of game. As Jared regularly emphasizes in the Condor Options newsletter, it’s important to size positions in proportion to their risk, and the same goes for determining how much to allocate to various strategies—which will be the subject of the next post in this series.