Suppose our account size is $230,000. Since one of our risk management rules says that we never risk more than 2% of our net liq, then we need to size our trades according to a Maximum Allowable Loss (MAL).
Suppose we want to achieve a 3% return per month using one of the following strategies. If it’s a bi-monthly strategy, we divide by 2 to get our desired profit per trade:
$$ \frac{3\%}{2} = 1.5\% $$
Let's assume we aim to generate 3% per month using the LT112 strategy. We examine our Net Liquidation (Net Liq) value to determine what constitutes 1.5% of it. If our account size is $230,000, then:
$$ \$230,000 \times 1.5\% = \$3,450 $$
We add $150 to this amount to account for the approximate 5% loss we expect by exiting the trade at 95% profit. We then divide $3,600 by 50 (the /ES multiplier) to get:
$$ \frac{\$3,600}{50} = \$72 $$
Therefore, in this example, we would be looking for a $72.00 credit when placing a new /ES LT112 trade.
However, one of our risk management rules is to never exceed 60% of the maximum allowed buying power (BP) on any single strategy. Thus, we would scale this accordingly; for instance, we might choose 3 strategies, each targeting a 1% income per month.
Since one of our risk management rules is to never risk more than 2% of the entire portfolio on any single trade, we can calculate our maximum number of units per month.
If our account size is $230,000, then 2% of that is equal to $4,600. Thus, we can never risk more than $4,600 on any single trade.
Suppose the NPs of an LT112 give us a credit of $17.00cr. Thus, we would receive a credit of:
$$ \$17.00 \times 2 \text{ contracts} \times 50 \text{ /ES multiplier} = \$1,700. $$
Since we use a 2X max loss (200% loss) on the NPs, this would be a loss of:
$$ \$1,700 \times 2 = \$3,400, $$
which is less than 2% of our Net Liq. Thus, we would be able to sell one unit of an LT112 on /ES.
Could we sell two units of an LT112 on /ES?