AJ Monte’s 1% Rule: How to Size Option Positions

AJ Monte's 1% rule is a simple way to leave emotions at the door when deciding how to size option positions

Justin Nugent

This article was last updated on 01/10/2023.

With the rise of popular subreddit Wall Street Bets came the rise of the infamous “YOLO.” For the uninitiated, a YOLO (meaning You Only Live Once) in trading means you’re using most or all of your account in order to make a high-risk trade. If it works — that’s great. If it doesn’t — you’re out of the game. 

Those of us with discipline know that YOLO trading is not an effective strategy. It doesn’t matter how sure you are that the plan will work out — good traders know that even the best plans can fall through. That’s why it’s important to have a hard and fast rule-of-thumb answer for the question: 

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How Big Should An Option Position Be?

Even the best options traders sometimes struggle with sizing their positions. “Do I buy one contract? Two contracts? 5% of my account? 50%?” The answer requires a little bit of nuance. Ask yourself how convicted you are about the trade. 

Often, our lead CMT AJ Monte will see a potential trade signal forming, and advise traders to take just half of a position as they wait for a particular indicator or set-up to become ideal.

But what is “half” of a position? 

For AJ Monte, it’s simple.

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AJ Monte’s 1% Rule

The 1% rule is the simple rule-of-thumb answer that traders can use to adequately size their positions. Simply put, in any given position, you cannot risk more than 1% of your total account value. 

Imagine your account is worth the PDT minimum of $25,000. You’re eyeing option contracts worth $0.50 ($50) per contract. Your 1% maximum position value is $250 for this position. That means you may buy up to 5 $0.50 contracts. 

The 1% rule may feel lukewarm if you’re used to gambling large portions of your account. But that’s a mindset you need to leave behind if you’re ready to get serious about your trading. Through the power of options leverage, swift account growth is still possible.

Bonus Tip: Know Your Max Risk

We’ve established that disciplined options traders don’t YOLO. They aren’t “all-in” on a trade. There’s a reason “all-in” is a poker term — because going “all-in” is for gamblers. But here’s one more thing disciplined option traders don’t do: 

Disciplined options traders don’t let their contracts expire worthless. 

Instead, disciplined traders set a max-risk. For instance, every trade insight from AJ Monte comes paired with a maximum risk per contract. Typically, it’s around 50%. For instance, a $4.30 contract may have a max risk of $2.15 per contract. That means if the contract loses $2.15 in value, it’s time for that trader to close the trade and reassess the thesis, or perhaps move onto the next trade entirely. 

We know. Sometimes, a massive overnight move will steal your option contract value before you ever have the chance to salvage it. Sometimes, options expire worthless and there’s nothing we can do to stop it. But if at all possible, you should set a max-risk when entering a trade, and stick with it — leaving your emotions out of the picture. 

These Two Tips Will Help You to Make More Consistent Trades

The reason why discipline is so important in trading is because money brings about emotion for people. When we see our account value growing, we can get a little greedy. When we see our account value descending, we can get a little desperate. These two emotions — greed and desperation — are not useful in trading. 

Trading is a logic game, not an emotional one. That means doing what you can to tilt probability in your favor, and keep it there. That means following a set of rules consistently in order to achieve consistent results. 

Think about this: You could make 10 YOLO trades and be right 9 times. The tenth time, when you’re wrong, you’re back to 0, or close to it. You may have racked up a higher account value in the middle of your journey, but at the end, you’re right back where you started — or worse. 

Conversely, you could make 10 disciplined trades, using the 1% rule, knowing your max risk per trade, and be right 9 times out of 10. Losing half a contract’s value after accruing several wins with the 1% rule means you’ve still locked in the majority of your gains. As your account continues its path toward consistent growth, so too will the size of even the smaller gains. 

In short: Trading is a marathon, not a sprint.

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