Page 1 of 1
How to determine position size based on volatility?
Posted: Mon Jan 08, 2007 5:15 am
by oem7110
Does anyone have any suggestion on how to determine position size based on volatility and leverage?
For example
daily range = $3, which risk $300 per contract.
maximum of risk is 2% of equity [50000] = 1000
leverage of products = 4 and 12 times
Do you have any suggestion on determining the position sizing for each leverage 4 / 12?
Thank you for any suggestion
Eric
Posted: Tue Jan 09, 2007 2:57 am
by Craig
The problem (as I see it) with this approach is that you can only base position sizes on volatility in the past, as such this may not be a good approach for your current trade as future volatility is still unknown. But I'm all ears if somebody has a suggestion.
More description about managing leverage and volatility for
Posted: Tue Jan 09, 2007 7:07 pm
by oem7110
Thank you for your reply
More description about managing leverage and volatility for position sizing
Usually, I can find leverage of trading products around 10 times, therefore, I feel comfortable to set 10 as my default leverage. For a rare case on bull market, I can only find 5 times for Call Option and 25 times for Put Option, therefore the problem for position sizing appears. My invested equity is $1000, if I expect the market moving up, then I can buy Call at 5 times leverage within $1000 equity, on the other hands, if I expect the market making top and turn down, then I can buy Put at 25 times leverage with $1000 equity.
Assume ATR = $3, which equal to 3% of stock price at $100
For Call, if the market moves up $3, then profit will be 5 x 3% = 15% of invested equity.
For Put, if the market moves up $3, then loss will be 25 x 3% = 75% of invested equity.
Therefore, if I insist on investing $1000 equity for both Call and Put, it will make my equity curve more volatile. For Call, the leverage [4] is less than my expected leverage [10], so I would like to increase the invested equity to match the performance of leverage [10]. For Put, the leverage [25] is more than my expected leverage [10], so I would like to decrease the invested equity to the performance of leverage [10], but I don't know how to approach for this situation. Does anyone have any suggestion?
Thanks you for any suggestion
Eric