Unit 4 · Level 1 · Buying options well
Sizing: the premium is the risk
The Trading course drilled the 1% rule: never risk more than 1% of your account on one trade. With stocks, risk was entry minus stop. Options simplify it brutally: assume the ENTIRE premium can go to zero. It can go there fast, sometimes overnight, when no stop-loss can save you. So the adaptation is one line: premium ≤ 1% of account.
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What you get asked
How does the Trading course's 1% rule adapt to buying options?
Since the whole premium is at risk, the premium IS your position risk. Budget it like a full loss from the start.
Your account is €10,000 and you risk at most 1% per trade. Treating the full premium as the risk, what's the most you should spend on one options trade?
1% of €10,000 = €100 of premium, total. If one contract costs €250, this trade is simply too big for this account. Skip it or find a cheaper structure.
Why treat the entire premium as the risk instead of relying on a stop-loss?
Wide spreads, overnight gaps and IV crush can vaporise an option's value between two prints. Stops are a seatbelt that sometimes isn't attached to the car.
Match each sizing idea to its meaning.
Same discipline as the Trading course, different arithmetic. The rule survives the translation; only the definition of 'risk' changes.
Options can hit zero, so size every trade as if the premium ___ be lost.
Plan for the worst case and every outcome above it is a gift. Ten 1% losses are a rough month; one 20% loss is a crater. 🐜
The rest of this unit
Defined risk, lottery tickets and IV crush: buy movement without burning the account.