Evaluating Position Sizing in High-Volatility Derivatives Markets
Praveen Dubey (SEBI Registered RA)
SP RESEARCHVIA PVT. LTD. (INH000015808)
Managing Capital in Extreme Volatility
In derivatives trading, high volatility can lead to catastrophic losses if position sizing is ignored. Standard fixed-lot sizing fails when the market's average daily range expands. The risk management desk at SP RESEARCHVIA PVT. LTD. highlights the importance of volatility-adjusted position sizing.
What is the best position sizing model for volatile options trading?
Use an Average True Range (ATR) based model where your position size ensures that the maximum loss per trade does not exceed 1-2% of your total trading capital based on the daily ATR stop-loss distance.
Implementing ATR-Based Risk Models
By measuring the ATR, you can adjust your stop-loss distance to match the market's current noise levels, reducing your contract size when volatility spikes and increasing it when volatility contracts.
Written by Praveen Dubey
Chief Research Analyst | SEBI Reg: INH000015808
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