Professional Trading

Risk ManagementConcrete Rules for Success

The most important rules professional traders follow. Protect your capital and maximize long-term profits.

The Most Important Rule
"Survive to trade another day"

8 Golden Rules of Risk Management

These rules are followed by professional traders worldwide. Memorize them.

1

The 1-2% Rule

Never risk more than 1-2% of your total capital per trade.

Formula:Max Risk = Portfolio × 0.01 (or 0.02)
Example:With €50,000 capital: Max risk per trade = €500-1,000
2

The 5% Portfolio Rule

Maximum 5% of portfolio in a single position (underlying).

Formula:Max Position = Portfolio × 0.05
Example:With €50,000: Max €2,500 in AAPL options
3

The 25% Cash Rule

Keep at least 25% of portfolio as cash reserve.

Formula:Min Cash = Portfolio × 0.25
Example:With €50,000: At least €12,500 in cash
4

The 50% Profit Rule

Close winners at 50% of maximum profit.

Formula:Exit = Entry Credit × 0.50
Example:Received $2.00 credit → Close at $1.00
5

The 200% Loss Rule

Close losers at 200% of received credit (for credit spreads).

Formula:Stop Loss = Entry Credit × 2
Example:Received $1.00 credit → Close at -$2.00 loss
6

The 45 DTE Rule

Open trades with 30-45 days to expiration (optimal for theta).

Formula:DTE = 30-45 days
Example:Today is March 1 → Select expiration: April 15
7

The 21 DTE Exit Rule

Close or roll positions at 21 DTE (gamma risk increases).

Formula:Exit/Roll at DTE ≤ 21
Example:Position still running → Close or roll to next month
8

The Delta-16 Rule

Sell options with delta ~0.16 (1 standard deviation, ~84% probability of profit).

Formula:Sell Strike at Δ ≈ 0.16
Example:SPY Put with delta -0.16 = ~84% probability of expiring OTM

Position Sizing Quick Reference

Quick Calculator

Portfolio1% Risk2% Risk5% Position25% Cash
€10,000€100€200€500€2,500
€25,000€250€500€1,250€6,250
€50,000€500€1,000€2,500€12,500
€100,000€1,000€2,000€5,000€25,000

Position Sizing Methods

Fixed Percentage

Simplest method: Fixed percentage of portfolio per trade.

Formula:Position = Portfolio × Risk%
Example:
€50,000 × 2% = €1,000 max risk
Pros
  • Easy to calculate
  • Consistent
Cons
  • Ignores win probability

Kelly Criterion

Mathematically optimal position size based on edge and win probability.

Formula:Kelly% = (W × B - L) / B
Example:
W=60%, B=1.5, L=40% → Kelly = (0.6×1.5-0.4)/1.5 = 33%
Pros
  • Maximizes long-term growth
  • Mathematically sound
Cons
  • Volatile
  • Often too aggressive (Half-Kelly recommended)

Volatility-Based

Position size adjusted to underlying volatility.

Formula:Position = (Portfolio × Risk%) / (ATR × Multiplier)
Example:
Higher vol = Smaller position
Pros
  • Considers market conditions
  • Risk-adjusted
Cons
  • More complex to calculate

Optimal Portfolio Allocation

Conservative

For beginners and capital-preserving traders

Cash Reserve40%
Stocks/ETFs40%
Options20%
Max Risk/Trade: 1%

Moderate

For experienced traders with stable income

Cash Reserve25%
Stocks/ETFs40%
Options35%
Max Risk/Trade: 2%

Greeks-Based Risk Management

Δ Delta

Directional Risk

How much does option price change per $1 move?

Recommendation
Keep portfolio delta near 0
Γ Gamma

Delta Change Rate

How fast does delta change? Increases exponentially near expiration.

Recommendation
Close positions at 21 DTE
Θ Theta

Time Decay

How much does option lose per day? Your friend as a seller.

Recommendation
Aim for positive theta portfolio
V Vega

Volatility Risk

How does position react to IV changes?

Recommendation
Before events: Reduce vega

Pre-Trade Risk Checklist

Position size checked?
Max 1-2% risk per trade
Portfolio correlation checked?
Not too many similar positions
Events checked?
Earnings, Fed, CPI, etc.
IV level checked?
IV Rank/Percentile analyzed
Exit plan defined?
Profit target and stop-loss
Max loss acceptable?
Can you handle this loss?
Liquidity checked?
Bid-ask spread tight enough?
Emotional state?
Calm and rational?

Put the Rules into Practice

Test your risk management skills risk-free with paper trading.