How I Manage Risk (When Buying Options)

If you’ve read my previous post — “How Much Risk Are You Really Taking?” — you already know my view on risk:
Treat every trade like watching your cash burn in front of you.
Ask yourself:
💭 “Would I be OK watching this much money disappear right now?”
If your answer is yes, take the trade and move on.
If it’s no, don’t do it — resize it.
🚫 What Not to Do:
Many traders fall into the trap of:
“I’ll think about it later”
“I’ll set a mental stop and cut if it hits my level…”
That approach has two fatal flaws:
#### ❗ 1. Execution failure
You might not react fast enough when the market hits your level — or worse, you’ll forget to act at all.
#### ❗ 2. Emotional resistance
Even if your stop level is hit, will you actually cut?
Probably not.
Human nature avoids pain and chases pleasure.
Cutting a loss — even a planned one — is painful. That’s why mental stops often fail.
Mental stops:
Add more burden to monitor
Add more emotion to your decision-making
That’s why I keep it simple.
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✅ My Risk Rule for Buying Options:
Every dollar of premium I spend is 100% acceptable to lose.
This way:
I don’t need a mental stop.
I don’t need to watch it every second.
I sleep well, regardless of outcome.
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📊 How Much Do I Risk?
It depends on account size and account type:
#### 📌 Main Account:
Risk 1–2% per trade
Never more than 5% on a single trade
Rarely hold more than 3 trades at once
Targeting 6–10% total exposure, only if trades are uncorrelated
⚠️ SPY & QQQ are NOT uncorrelated — don’t fool yourself.
#### 📌 Small Account:
Can risk 5–10% per trade, but only on A+ setups(See: “What’s Your Catalyst?” for what qualifies as A+ in my book)
The goal of a small account is different: it’s about growth — but still must be strategic.
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💰 “But How Can I Make Big Money Risking So Little?”
This is the common pushback I get:
“Shouldn’t we take big risks to get big rewards?”
Sure — high risk = high reward.
But high risk also = high chance of blowing up.
Even if you hit a few big winners, you’ve compromised your long-term survival.
That’s not trading. That’s gambling.
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🧠 What I Actually Look For:
Low Risk / High Reward.
Yes, they’re rare.
Yes, they’re like lotto tickets.
But you don’t need to win often if you only risk a little and win big when it counts.
What’s not rare is:
Traders risking big on uncertain setups
Going all in on gut feelings
Wiping out in one or two bad trades
That’s not strategy — that’s self-destruction.
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🧾 The 2 Core Rules of Risk:
Protect capital at all costs
Only take trades where potential reward outsizes the risk
Don’t flip the logic.
Too many traders hear “high risk = high reward” and assume high risk is required.
It’s not.
That mindset is built for Vegas, not for Wall Street.
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🧠 If You Want to Be a Trader — Not a Gambler:
You must believe in:
Small risk, big reward
Patience
Discipline
Letting time and luck compound your edge
No other way.
🎯 If you truly get this… congrats.
You’ve crossed the line from gambling to trading.