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Risk | Capital Allocation - Oct 24, 2014 | Market Measures
Find out why you should use more capital when Implied Volatility (IV) Rank is high and you are trading options!
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Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
Market Measures

Risk | Capital Allocation

Oct 24, 2014

When trading options, it is always important to keep the size of your trades small in order to avoid large drawdowns in your portfolio. However, it is also important to make sure you are putting enough capital to work in order to increase your probability of success and see a good return on capital. For this reason, we often talk about scaling into trades when Implied Volatility (IV) Rank is high. We can do this by increasing our number of trades and putting a larger amount of our portfolio to work. Today, Tom Sosnoff and Tony Battista take a look at three different sized portfolios, $20,000, $100,000 and $500,000. The compare two strategies of using a conservative amount of capital for each account or using a larger amount of capital as IV Rank increases. They find that even though the largest loss is much bigger when using more capital, in the end you are more profitable by scaling up when IV Rank is high!

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