Chapter 2 of 4
Position sizing concepts
Translate a hypothetical exposure and adverse-price assumption into rupee amounts, while recognizing gaps and lot constraints.
In this chapter
Exposure is the starting point #
Position size determines the rupee effect of a price change. For a simple linear holding, gross P&L equals change per unit multiplied by units. For a contract, the quote unit and multiplier matter; a screen quote is not automatically the value of one entire lot.
Margin committed and economic exposure are separate. A smaller initial funding amount can support a much larger contract value, leaving a significant sensitivity to a small percentage move. Position size should therefore be stated in units, not just in rupees deposited.
A conditional risk-budget calculation #
An educational worksheet can divide a user-chosen hypothetical risk budget by an assumed adverse move per unit. If lot sizes apply, the result must be rounded down to whole lots. Costs or a per-unit execution allowance should be included consistently.
This arithmetic is not a recommended risk percentage or an order instruction. Its output depends on an exit being available near the assumed level. Price gaps, options nonlinearity, illiquidity and delivery obligations can make actual losses different.
Funding and portfolio constraints #
A risk-budget result may exceed available cash, permitted exposure or broker limits. It can also ignore existing positions with the same driver. The calculation must not be described as an amount that is safe or affordable merely because one formula permits it.
Use the position-sizing worksheet to change assumptions. Compare its estimated loss with a separate stress scenario and the margin funding worksheet. A plan based on favorable liquidity deserves explicit scrutiny.
Decision lab: Quantity is solved after invalidation #
A fictional setup has entry 500, invalidation 492 and a 2-point per-unit friction allowance. A ₹1,000 planned-risk budget permits 100 units before affordability, lot and portfolio caps. Choosing 200 units and halving the stop changes the hypothesis rather than just its size.
Recalculate quantity after an opening gap changes the entry to 505. Use the unchanged structural invalidation and the same cost allowance. Then impose a cash cap and a whole-lot constraint; explain why the permissible result may be zero.
Hypothetical worked example
Round to lots rather than pretending fractional contracts are possible
For a fictional ₹1,00,000 scenario and a user-entered 1% risk budget, the arithmetic budget is ₹1,000. With entry 200, assumed exit 195 and ₹1 per-unit cost allowance, scenario loss is ₹6 per unit.
If a lot is 50 units, one lot has ₹300 scenario loss. The budget accommodates floor(1,000 ÷ 300) = 3 lots, or 150 units, with ₹900 estimated loss. Four lots would exceed the stated budget.
The exposure at entry is ₹30,000. A gap to 190 would produce a larger loss than the worksheet’s assumed five-point adverse move. Neither the 1% choice nor the three-lot result is a recommendation.
Common mistakes
- Rounding up to the next lot.
- Presenting a stop-distance calculation as a maximum loss or suitability check.
What does a stop-distance sizing result depend on?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Sources and further reading
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.