The Core Rule: Max Risk per Trade
Never risk more than 3-5% of your total account on a single credit spread.
This applies to your maximum loss, not your credit received.
Example: $50,000 account, 5% max risk = $2,500 per trade.
With a $5-wide spread and $1.30 credit:
With a managed stop at 2× credit:
Why? Because stops can gap through. If SPY drops 3% overnight, your stop at 2× credit might not save you — you could take nearly full max loss.
Position Sizing by Account Size
| Account Size | Max Risk (3-5%) | $5-Wide Spread ($370 max loss) | Contracts |
Small accounts ($10K or less): Use 1-2 contracts maximum. Consider narrower spreads ($2.50 wide) to reduce per-contract risk.
Medium accounts ($25K-$100K): 3-10 contracts per trade gives you enough size for meaningful income without catastrophic risk.
Large accounts ($100K+): You can run 10-30 contracts, but consider splitting across multiple underlyings rather than loading up on one stock.
Total Portfolio Risk
Individual trade sizing is only half the equation. You also need to cap your total portfolio risk — the sum of max losses across all open positions.
Rule: Total max loss across all positions should not exceed 25-30% of your account.
Example: $50,000 account, 25% portfolio cap = $12,500 total risk.
If each spread has $370 max loss and you're sizing at 5 per spread:
This means you can have about 6 credit spread positions open simultaneously, each with 5 contracts. If everything goes wrong at once — a flash crash, a black swan — you lose 22% of your account. That's painful but survivable.
The Correlation Problem
Six credit spread positions don't provide 6× diversification if they're all on tech stocks or all bull put spreads.
Scenario: You have put spreads on AAPL, MSFT, GOOGL, AMZN, META, and NVDA. The market drops 5% in a week. All six positions go to max loss simultaneously.
This is why sector and directional diversification is critical:
Adjusting Size for Market Conditions
High VIX (>25): Reduce position sizes by 25-30%. Volatility means larger adverse moves are more likely. The premium is bigger, so smaller size still collects meaningful income.
Low VIX (<15): Standard sizing or slightly larger. The market is calm and moves are small. But don't oversize just because everything seems safe — that's when complacency bites.
After a losing streak: Do NOT increase size to "make it back." If anything, reduce size by 25% until you have two consecutive winning trades. This prevents the revenge trading spiral.
After a winning streak: Don't increase size more than 10-15% above your baseline. Winning streaks end, and oversizing at the peak is how traders give back months of profits in a week.
The 1% Rule for Beginners
If you're new to credit spreads, start even more conservatively:
Risk no more than 1% of your account per trade.
On a $25,000 account, that's $250 max risk — basically 1 contract of a $2.50-wide spread. This feels painfully slow, but it accomplishes two things:
After 30-50 trades, you'll have real performance data. If your win rate is 70%+ and your P&L is positive, gradually increase to 2%, then 3%, then 5%.
The Kelly Criterion Shortcut
The Kelly Criterion tells you the mathematically optimal bet size:
Kelly % = Win Rate - (Loss Rate / Win-to-Loss Ratio)
For a typical credit spread: 75% win rate, $130 average win, $370 average loss:
This suggests risking about 3.8% of your account per trade — right in the 3-5% range. Most practitioners use "half Kelly" (1.9%) for additional safety.
Tracking and Adjusting
OptionsPilot displays your portfolio heat map — showing where your risk is concentrated by underlying, sector, and direction. When you see 60% of your risk in tech put spreads, that's a signal to diversify before adding another position.
The traders who survive long-term aren't the ones with the highest win rate or the fanciest strategy. They're the ones who size correctly and live to trade another day. Get this right and everything else is optimization.