Risk policy proposal

Rules beat improvisation. This page is a starter template for defined-risk credit spreads: common retail guidance mixed with curriculum defaults you should adapt.

Not financial advice

Only you can decide what you can afford to lose. These numbers are not advice and not optimal by law of nature.

Principles in plain language

1. Measure risk as max loss, not as the stock’s share price.
2. Ban naked / undefined short options for live use until you explicitly unlock them. Naked short calls can lose without a structural ceiling. [verified]
3. Prefer skipping a bad entry over “fixing” a disaster mid-flight.
4. Start smaller than your ego wants. That is process advice, not a substitute for the table below.

Starter controls

Control	Starter default	What independent guidance often says	How to treat it
Max loss per trade	You must set a hard cap (cash and/or % of equity)	Teaching material often cites ~1–2% of equity per trade [verified] as common guidance	Make it personal and write it down
Portfolio heat	Sum of open max losses ≤ 20% of equity	Conservative writeups often sit nearer 10–15%; 20% is looser [operator preference]	Adapt deliberately
One underlying	Max loss to one name ≤ 10% equity	Many guides use tighter single-name caps [operator preference]	Adapt deliberately
One sector	≤ 25% of heat in one sector	Common discussion band ~15–25% [operator preference]	Warn or hard-block
Undefined / naked risk	Banned	Aligns with OCC-style uncovered writing warnings	Hard ban
Earnings window	No new short premium inside N days (starter N = 5)	Gap + IV behavior [verified]; exact N is preference	Hard block unless audited override
Weeklies	Prefer monthlies; weeklies smaller	Gamma rises near expiry	Soft preference
Too many positions	Soft cap (for example 8–12)	Cognitive load for part-time operators	Soft cap
Kill switch	Stop new risk-taking; alerts only	Process design	Manual

Heat, as a formula

\[ \text{heat} = \frac{\text{sum of open defined max losses}}{\text{account equity}} \]

When you size a new trade, include its max loss in the sum as if it already filled.

A gentler starting point

If 20% heat feels aggressive, try this trial band first:

• About 1–2% equity max loss per trade
• About 10–15% total heat
• About 5–8% in one underlying
• About 15–20% of heat in one sector

Then loosen or tighten on purpose — not by accident after a hot streak.

Operator-locked trial (percent of equity)

Locked in the private decision log (Week-2 workshop). Dollar amounts stay private — public pages use percents only. [operator preference]

Control	Locked trial
Max loss per trade	2% of equity (structural max loss)
Portfolio heat	12% of equity
One underlying	5% of equity
One sector	15% of heat
Earnings blackout	5 trading days (new short premium)
Soft max open positions	6–8
Manage default	Close or roll around 21 DTE (do not sit expiration week as the base case)
Short-delta band (when on credit spreads)	~15–30 absolute delta; width so max loss respects the 2% cap
Undefined / naked	Banned
Live ladder	Long calls/puts → covered calls → CCS/PCS

These replace the looser 20% / 10% / 25% starter defaults in the table above for this operator. Recheck if equity or the debit cap changes.

Write your own numbers

Capture dollars somewhere private you will actually obey (not on a public site):

Decision	Your number
Max loss per trade	2% of equity (private CAD figure in operator log)
Max portfolio heat	12%
Max loss per underlying	5%
Max heat per sector	15% of heat
Earnings blackout (trading days)	5
Soft max open positions	6–8

What to do next

If you are in Canada, read Canadian brokers, TFSA constraints, and cash vs margin before you assume a strategy is allowed where you fund it.

Sources

• Retail position-sizing discussions (1–2% per trade; heat bands) — see Sources
• OCC Characteristics and Risks of Standardized Options
• Event-vol explainers (for example tastylive on IV crush)

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Not financial advice. Verify broker and CRA rules yourself.