How to determine position size based on volatility?

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oem7110
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How to determine position size based on volatility?

Post 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
Craig
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Post 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.
oem7110
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More description about managing leverage and volatility for

Post 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
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