| name | position-sizing |
| description | Size an options position using Kelly-fraction or max-loss-based methods. Use this skill when the user asks "how many contracts should I sell/buy", "what size for this credit spread", or wants a capped-loss sizing for premium-selling strategies (cash-secured puts, credit spreads, iron condors). Triggers: "how much should I size", "kelly fraction", "position size", "max loss sizing", "risk per trade", "capital allocation for options". Do NOT use to recommend a trade — pair with `strategy-selector` for that. This skill only sizes a trade the user has already chosen.
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Options Position Sizing
Translate "I have $X in capital and a max-loss tolerance of $Y per trade" into a number of contracts. Supports two methods: fixed-max-loss (recommended for most retail) and fractional Kelly (for users who have a win-rate / payoff estimate).
Step 1: Capture Inputs
| Input | Notes | Default |
|---|
| Total account capital | Used for the % of book check | required |
| Max loss tolerance per trade | $ or % of book | 1–3% of book |
| Trade max loss (per contract) | From options-payoff | required |
| Trade max profit (per contract) | required for Kelly | |
| Win probability estimate | required for Kelly | |
| Buying-power requirement (per contract) | For broker margin sizing | varies |
If trade max loss is "unbounded" (naked call, ratio spread short side) → refuse to size with this skill. Use a closing rule instead, or pick a different structure via strategy-selector.
Step 2: Fixed-Max-Loss Sizing
N_contracts = floor( max_loss_tolerance / per_contract_max_loss )
Cap further by:
- Buying-power:
N ≤ floor(account_capital / BP_per_contract)
- Concentration: a single underlying shouldn't be > 20–25% of book BP
Worked example: $50,000 account, willing to risk $500/trade, iron condor with $4.20 max loss → N = floor(500 / 420) = 1 contract.
Step 3: Fractional Kelly (advanced)
Full Kelly fraction:
f* = (p · b − (1 − p)) / b
Where p = win prob, b = win/loss ratio = max_profit / max_loss.
Do not use full Kelly for options. Standard practice is 0.25 · f* ("quarter Kelly") because:
- Your p estimate is noisy.
- Path-dependent drawdowns are brutal at full Kelly.
- Variance of returns is enormous — full Kelly leads to expected log-utility but huge equity swings.
contracts = floor( 0.25 · f* · account_capital / per_contract_max_loss )
Refuse to size if f* ≤ 0 (negative edge — the trade has negative expected value). State this explicitly. Don't size a losing trade.
Step 4: Sanity Checks
- Won't blow the account on N consecutive losses: at 3 standard deviations of consecutive losses (binomial), would the account survive? If not, halve N.
- Margin call risk on undefined-risk legs: if buying-power requirement could grow with adverse moves (short put), assume worst case = strike × 100. Use that as your BP, not the broker's initial margin.
- Correlated positions: if user already has 5 short-vol trades on tech names, don't size a 6th tech short-vol — concentration risk dominates per-trade math.
Step 5: Respond to User
| Method | N contracts | $ at risk | % of book | Notes |
|---|
| Fixed max-loss | … | … | … | Recommended |
| Quarter Kelly | … | … | … | Requires reliable p estimate |
| BP-capped | … | … | … | Broker constraint |
End with: "Final size: N = min(...)" — the most restrictive of the three.
Important caveat to include: "Your stated win probability is a guess. If it's wrong by 10%, Kelly sizing scales linearly. Always start smaller than you think."
