Position Sizing and Portfolio Heat

What this unit covers

Learn to size a derivatives position against your whole portfolio's risk, the total capital at risk across all open positions at once.

By the end you will be able to

• Define portfolio heat as the total capital at risk across all open positions.
• Explain how individually safe positions can combine into risky total exposure.
• Calculate current portfolio heat and check it against a personal heat ceiling before adding a trade.

How it starts: Three Safe Trades

1. You hold three futures positions, each risking 1 percent of your capital.
2. You check every position alone and each one clears your safety rule.
3. If all three lose at once, what share of your capital is at risk?

Words you will meet

Portfolio heat

The total risk of every open position added together, shown as a percentage of your capital.

Heat ceiling

A personal limit on total portfolio heat that you set in advance, not a rule set by an exchange.

In this module: Risk Management in Derivatives

1. Margin and Liquidity
2. Position Sizing and Portfolio Heat (this unit)
3. Gap and Tail Risk
4. Pre-Trade Plan, Stress Test & Review