Credit Put Spreads Part 1 - Lot size

Risk Management – there are several ways I use to try to reduce my risk. I will use the example put credit spread of AAPL 515/520 for 1.00 credit. For a 10 lot it will require $4000 of buying power. Your max loss is $4000 if stock closes below 515 on option expiration. ($5 wide spread is $5000 minus the $1000 credit you receive when selling the spread gives you the $4000 potential max loss)

1.       Lot size – lots are how many option spreads you sell. I usually stick to a 10lot, meaning I sell 10 of the 520 puts and buy 10 of the 515puts. I do this so my account is not over weighted on just one security.  You may have a $100k account and could do an all in trade and sell a 100s of lots. But obviously if the stock closes below 515 at options expiration it would almost wipe out your account, also you would not have any capital left to roll the position to the next month if needed. By only selling a 10 lot, your max loss is only $4000. This allows you to diversify and sell spreads on several different stocks at the same time.  Being consistent with the 10 lot guideline keeps my head from getting big and keeps me from being too risky when I start feeling really good about my stock picking prowess.  Similar to this is to commit only a certain amount of capital to the trade, say $5K or $10k.. so you can increase the lot size if you are going to use tighter strikes.. like $5 wide vs $2.50 wide on some stocks. If you are working with a larger account size, then maybe a 20lot max might be appropriate. You can even use the guideline of risking a certain percent of your account to determine how many lots to enter into.

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