Equal Value vs Equal Size

I tried to weight the size of trades based on the value of the overall trade early on and I found it cumbersome and I ended up being selective as to when I would choose to apply the rule strictly and when I might fudge it based on my judgement, whether right or wrong.

Hence I ended up adopting the same sizing rule. I must say that it is working well. Of course some downsides are that I will be trading a smaller priced option for less potential profits as the trade is closed out for a smaller dollar value gain even though it may be the same percentage gain based on the option price.

So, taking a minimum trade size of 2 contracts and starting with $6,700, roughly my startup, and comparing it against sizing according to a 10 concurrent trade at $670 per trade the results are interesting.

All trades taken since March 1st, 217 trades.

2 contracts every trade = 121% gain over all
2 - 26 contracts per trade based on $670 trade value = 206% gain overall

Based on scanning the spreadsheet I would say that about half or more were 2 contract trades so the difference in performance might not be as great as it could be. So, let's bump up to a $25,000 account and see.

At $25,000 splitting into 10 trade sizes leaves $2,500 per trade. Comparing that against an average price of $2.68 per contract producing a 9 contract per trade possibility for every trade the results are interesting, if not as profound as I expected.

9 contracts every trade = 207%
3 - 100 contracts = 283%
3 - 50 (the accepted sizing cap) = 259%

As the account grows and the trade sizes grow with it the difference gets less pronounced again, especially as I need to introduce a trade size cap into the equation. I figure that a cap of 50 contracts per trade is about where it should be, even though 10-15 is the suggested maximum I have reasons and methods to use the higher count to not affect the trade setups or to at least equate the option trade to a stock equivalent.

So a $50,000 account with a 50 contract cap:
18 contracts per trade = 215%
6 - 50 contracts = 256%

This leads me to question how much of an advantage same sizing based on trade value is over same sizing based on contract quantity per trade. Taking this a little farther, and not getting too complicated, I took the cumulative profit for all of the trades based on $6,700, $12K, $25K, $37.5K and $50K and treated the current trade count as if it were a quarter's worth of trading (close) and compared them. I bumped to the next level each quarter for five quarters.

over the period 2 - 18 contracts per trade = $264,931
Same period, size based on value capped at 50 contracts = $334,362

Only a 26% difference (still, that's $69,431).

OK, I could use an extra $70K anytime BUT is it worth it in the end?

Consider that execution is the key in getting into and out of trades with more profits. Today, and yesterday, I managed to get into all of the trades at the suggested prices or better, I am fast and my platform is fast. Stopping to change the quantity before hitting the order button can make the difference in missing an entry or taking a lower bid to get out, this is daytrading afterall. A few pennies here and there don't sound like much but if I made and average of 2 cents more over all my trading (easily possible) it adds up to $18,364 over the five quarter sample.

Take that one step farther again and consider that I may miss, on average, 1 in 10 trades due to that delay (it has happened often enough already) and I may get on average 2 cents less per trade overall. That would be a $20,460 missed profits and $18,264 in lower profits or $38,724 overall.

Basically it starts getting to the point of splitting hairs. If I were trading based on value all the time I would be quick enough on the buttons that it would be less and less of a factor over time. As it is, I am satisfied with my current performance numbers. The value trading over quantity trading makes more of a difference on the lower account size and that is changing every day. I also am increasing the trade sizes regular enough that the previous comparison would be much more complicated to set up as I grow in trade size more often than quarterly. This may have skewed the results in favour of value sizing over same sizing so I will consider perhaps using some wider sizing guides to have a few different sizes based on a price range, less thinking or referring. 5 might be the default and 3,4,6,7 might be the slight adjustment factor if the price is much higher or lower than the $2.68 average.

Jeff.