Good morning, traders…

There’s a lot to focus on when you’re trading options. Strikes, expiration dates, volatility, The Greeks, trends, direction, etc…

But there’s one crucial aspect that often gets overlooked — position sizing. 

Not focusing on sizing is a common problem, especially when a trade looks too good to pass up. 

It’s easy to focus on trends and charts, but without the right size, even the best-looking setups can quickly turn into unnecessary losses. 

Knowing exactly how much to risk — and when — is critical to your long-term success as an options trader…

This is where risk zones come in. Recognizing these hidden zones is the key to perfecting your position sizing. 

Don’t believe me? Let me show you how using risk zones to size your positions can transform your trading forever…

What Are Risk Zones?

When looking at a chart, levels of support and resistance will show you the risk zones — areas where the share price is more (or less) likely to hold. 

I like to break these zones down into four key levels based on common moving averages, which act as a guide for positioning trades:

8 EMA (Exponential Moving Average) – This is the fastest moving average and reacts quickly to price changes. It’s useful for short-term momentum trades.

21 EMA – This one provides a bit more stability and acts as a good balance between short and medium-term trends.

34 EMA – This is a slower-moving average that offers stronger support and resistance, often useful to confirm longer-term trends.

Each of these moving averages can serve as a goalpost to determine different risk levels when entering a trade:

Risk Level 1 (Highest Risk) – Above the 8 EMA

• Entering above the 8 EMA means the stock has already made a move, and you’re getting in with little cushion below.
• The higher the price relative to the moving averages, the greater the risk.
• This zone calls for the smallest position size because the likelihood of a pullback is higher.

Risk Level 2 – Between the 8 EMA and 21 EMA

• This area provides a slightly safer entry, with the 21 EMA acting as a potential support zone.
• A moderate position size can be used here, as there’s still some risk but also a reasonable support level nearby.

Risk Level 3 – Between the 21 EMA and 34 EMA

• This level is a stronger support area where the price has a higher chance of bouncing.
• Entering here allows for a larger position size since risk is lower and reward potential is greater.

Risk Level 4 (Lowest Risk) – Near the 34 EMA (or key support)

• This is the safest zone to enter because it’s closest to a major support level.
• The stop loss can be tighter, making it possible to take the largest position size in this area.
• The goal is to wait for the price to pull back into lower-risk zones whenever possible, providing better trade positioning with less downside exposure.

Position Sizing by Risk Level

Here’s how I would size my positions based on risk zones:

Highest risk zones = smallest size

Entering far from support means taking a cautious approach, using only a small percentage of the overall allocation — maybe 1% of your account for this trade.

Moderate risk zones = medium size

As the price moves closer to support, position sizing can increase — typically around 2-3%, depending on the strength of the setup.

Lowest risk zones = full size

When price is right at a strong support level, it’s possible to take the largest size — potentially 4-5%, because the downside risk is smaller and well-defined.

If the price moves from one zone to another, each level should be treated as a separate chance to enter the trade.

NOTE: If you’re trading a small account ($1000 or less), you’ll probably need to risk a larger % of your account in the beginning. That’s okay, as long as you’re never risking more than you’re willing to lose. 

How Risk Levels Affect Entries

Understanding risk zones allows for better control over entries. 

Taking a small position makes sense if you’re entering at risk level 1 since it’s the highest-risk entry. This way, if the trade doesn’t work, the loss is minimal.

If the price pulls back to risk level 3, adding to the position is possible because there’s more confidence in the trade.

If entering at risk level 4, going in with the largest size is an option because there’s stronger support to lean on.

Here’s how I typically approach it:

• If I want to allocate 5% of my account to a trade, I won’t put all of it in at the highest risk level. Instead, I might put in just 1% at first.
• If the price moves into a better risk zone, I can increase my position size accordingly, keeping my total risk in check.

This strategy helps avoid getting too aggressive at the wrong spot and allows for adjustments as price action develops.

Starting small in higher-risk areas and adding in lower-risk zones helps manage trades more effectively and keeps losses in check.

The next time you’re looking at a setup, take a moment to evaluate where the price is relative to key moving averages — and size your position accordingly.

Happy trading,

Ben Sturgill

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