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Why your position size should match the risk you’re actually taking

I want to walk you through something that matters more than the trade itself: position sizing for binary earnings plays versus longer-term setups.

If you’ve been around options for any length of time, you know earnings trades can be tempting. The moves are big, the potential returns look juicy and it feels like the next logical step after you’ve nailed a few directional trades.

But here’s the thing — earnings are always lotto plays. That’s not being dramatic. That’s just how they work. They’re binary. They either pop or they don’t.

And if they don’t, IV crush (the rapid collapse of implied volatility after an event) will eat your premium faster than you can refresh your brokerage app.

This is exactly why you must size them differently than traditional investments. Compare a speculative event trade to something like a January LEAPS — an option expiration extending beyond one year — on a name you believe in, or a debit spread you’re holding for months based on a fundamental thesis.

Those are longer-term plays with entirely different risk profiles. You can afford to give them room to breathe.

The OKLO & OKLL Case Study

To see how quickly this dynamic can turn against an aggressive trader, look at the classic relationship between Oklo (OKLO) and Defiance Daily Target 2X Long OKLO ETF (OKLL).

During periods of peak hype, buying straight options on OKLO can become incredibly expensive. To bypass those high premiums, some traders look to OKLL, where a position might cost a fraction of the price.

That price difference matters. But even at a lower entry cost, a high-implied-volatility event requires strict discipline. This isn’t a situation where you go all-in with a primary retirement account.

This type of setup is a small, defined bet on a single event. You size it so that if it goes to zero, you shrug and move on.

The volatility in these instruments cuts both ways. OKLL famously rocketed to a 52-week high near $170 before aggressively dropping back into the single digits. If a trader sizes an event-driven vehicle like a long-term conviction trade, a structural drawdown like that can be devastating to an account.

The Reality of IV Crush

Consider what happens when a highly anticipated company finally reports earnings. Leading up to the announcement, uncertainty drives implied volatility through the roof, making the options incredibly expensive.

Once the numbers are released — even if the stock stays relatively flat or moves slightly in your direction — that uncertainty vanishes. Implied volatility collapses immediately.

If you buy out-of-the-money (OTM) calls expecting a massive upside explosion, you can easily sit on a total loss the next morning purely because the premium deflated. That’s IV crush in action — and it’s exactly why short-term event trades need to be treated like lotto tickets.

A Simple Rule You Can Copy

The Single-Event Rule: If the trade hinges entirely on one headline — earnings, an FDA approval or a Fed decision — treat it like a lotto ticket. Keep the position size small enough that a total loss won’t impact your mental capital.

The Trend Rule: If you’re building a position over weeks or months with a core thesis that doesn’t depend on a single calendar date, you can afford to allocate more capital.

Before you place your next trade, ask yourself one question: Is this an earnings play, or a position I am willing to hold through the noise?

Your position size should match your honest answer.

To better trading,

Alex Reid
WealthPin

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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk. 

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