As I often say in my Group Coaching class, you have three different sizes to choose from as far as contracts go. A trader can select an option contract size based on his understanding. Here is a short blog to shed some light on how I personally choose between them and a few of the reasons behind each choice.
I generally consider using a full-size contract portion when I deem the trade to be “money lying in a corner.” To me that means the trade looks so good that I feel confident it has the potential to profit. One of the triggers for this type of trade, for example, would be having a bullish bias on a stock and on the overall market as well. Or for a time spread, an IV skew that cannot be ignored. Whatever full-size means to you (for this example let’s use 10 contracts), this is where I might put on a trade with 10 contracts.
If 10 contracts are full size, then five contracts are half size. To me, these are trades that look good but maybe the market is jittery, or I am considering a bearish trade idea and the market looks like it wants to head north. Of course, if the market does move higher, that does not mean my stock will not move lower, but there is some concern. Since I personally trade less OTM (out-of-the-money) vertical credits than debit spreads, I might use half-size for an OTM credit spread.
To me nibble option contract size is maybe taking a little extra speculative shot at a trade. For example, maybe I am looking for a move over a resistance area for a bullish trade opportunity and the stock has not yet cleared that level, but I think it will eventually do it. Here is a spot where I might just put on two or three contracts to “test the water.” In other words, I am waiting for confirmation but have not received it as of yet. Another time I might do a nibble-size portion is with a speculative trade that has low risk and high reward.
It does not matter how you break down your option contract size, but it does matter that you consider doing different sizes based on criteria you have set for yourself. Good luck!
Senior Options Instructor
Market Taker Mentoring, Inc.