lystn

Hey everyone, Kirk here again and welcome back to the daily call. On today's daily call, we're going to answer the question – "What metrics should you use for determining your position sizing?" Now, specifically, inside of Thinkorswim, there's a couple of different metrics that they give you. They give you things like option buying power or stock buying power and this maybe the same for your broker too. I'm just again, speaking with Thinkorswim because that's what we're at right now. They also give you cash and sweep vehicles, available funds for trading and then net liquidity or net liq and day trading power. The one that we always use and I think the one that people assume we use… People assume we use available funds for trading and we don't use that. We don't use that because that's what's left over from either investments that you have or money that's tied up in your margin account. If you have let's say a $100,000 account, you might have already committed $50,000, so your available funds for trading is $50,000, but that doesn't mean that you should calculate your position size based on that $50,000. What we use is we use net liquidity and that's I guess the best representation because that's how much money you actually have if you were to liquidate all your positions. Again, sometimes what you'll also see is you'll also see there's a cash and sweep vehicle and that's usually a little bit higher because in most cases, as you're option selling, you're collecting all of this cash upfront and so, it's assuming that you have this cash, but again, your positions aren't liquidated yet, you haven't closed your position out. Although you've collected cash, you can't keep it until you actually reverse the trade. You have to reverse the position. That's why we use net liquidity as the basis for determining position sizing. Again, if you're going to do the 1% to 5% position sizing that we suggest here at Option Alpha, that we've suggested for years here at Option Alpha. It's got to be based on that available funds or I'm sorry, that net liquidity that you have in your account because again, that's what you have to determine it based off of how much money do you actually have if you were to liquidate your account. Hopefully that helps answer the question. As always, if you have other questions, let me know. Shoot an email over to me at Option Alpha through our support page, Tweet at us, Facebook us, whatever you need to do to get your questions in and help us continue to answer more questions on this daily call podcast. Until next time, happy trading!