HL Financial Strategies 101: Position Sizing & Portfolio Construction
Part 6 of our Beginner Series
Hey everyone and welcome back! We’ve covered a lot up to this point, so here’s a quick refresher. Up to this point in the series, we’ve covered:
What stocks and options are
The difference between buying and selling options
How the Wheel Strategy works step-by-step
Capital requirements and realistic expectations
And most recently, what can go wrong
It was a lot of topics! But all fundamental steps to now move into something more practical and what’s usually on everyone’s minds: How do you actually structure this inside a portfolio?
This is the “fun” part once you understand the mechanics and the risks of the Wheel, but now we have to make sure we apply all of the earlier principles when allocating our capital. The next questions I always get:
How many positions should you run?
How much capital should you allocate per trade?
And how do you avoid putting your entire account at risk?
This is where position sizing and portfolio construction come into play.
Why Position Sizing Matters
Position sizing is one of the most important aspects of any options strategy — not just the Wheel, but applies just the same. Even the best strategy in the world can fail if positions are too large relative to the account.
Think about it this way: If one trade goes wrong and significantly damages your portfolio or blows it up completely, the position was probably too large to begin with.
With the Wheel Strategy, the key risk comes from the assignment. When you sell a cash-secured put, you must be prepared to buy 100 shares of that stock if assigned. That means every position has a defined capital requirement. And if too much capital is tied to a single position, it becomes difficult to manage the rest of your portfolio effectively.
In other words, would I be okay to buy 100 shares of XYZ stock, regardless of short term directional outlook, if it were offered to me at X price? This answer should always be yes when entering a cash secured put position. If not, then it’s probably not a position I would want to enter in the first place.
A Simple Rule of Thumb
A guideline that works well for many Wheel traders (myself included) is:
No more than 25% of total capital allocated to a single position.
This means if assignment occurs, that one stock does not dominate your portfolio. For example:
Portfolio size: $100,000
Maximum capital per assignment: $25,000
This allows you to run multiple positions simultaneously while still keeping risk spread across several diversified names.
It also gives you flexibility if markets move quickly.
Running Multiple Positions
Once your capital grows, the strategy becomes much more efficient.
So instead of running one wheel position at a time, you may run several simultaneously across different companies.
For example:
A realistic $100,000 portfolio might look like:
$20,000 allocated to Company A
$15,000 allocated to Company B
$40,000 allocated to Company C
$10,000 allocated to Company D
The remaining $15,000 on cash reserve
This structure provides several benefits:
Premium collected from multiple sources
Diversification across multiple companies
Reduces impact if one stock struggles
Flexibility to open new positions when opportunities appear
As you get a feel for this type of allocation, the Wheel begins to feel more like a systematic income engine. Notice how I don’t evenly spread across each position either, because in the real world, now every single position will be exactly $25,000 x 4 for you! Stock prices vary. So should your allocation. One company can be $100/share, the other can be $400/share.
When to Slow Down
Another important part of portfolio management is knowing when not to open new positions.
Sometimes markets become extremely volatile or uncertain. Currently, we are experiencing this now! With geopolitics, AI disruption, etc., etc. In these moments, it may make sense to take a step back and try to:
Reduce new trades
Wait for better entries
Hold more cash temporarily
The Wheel works best when positions are opened with patience.
Opening too many positions during unstable markets can quickly lead to multiple assignments at the same time.
Building a Durable System
When position sizing and diversification are handled correctly, the Wheel becomes much more durable.
Instead of relying on a single trade working perfectly, the strategy benefits from multiple independent positions working together.
Some trades may be assigned.
Some may expire worthless.
Some may require rolling.
Over time, the portfolio continues generating premium across different names and cycles.
And that consistency is where the strategy shines.
What’s Next
I’ll look to pause here and continue on in the next post, where we’ll dive into something that’s always on everyone’s mind:
WHICH STOCK DO I GET? :)
Everyone wants to know the next hot thing and be the first to know about it, but the Wheel Strategy isn’t about finding the next hot moon shot, but rather, what can systematically generate me consistent income. So we’ll dive in to how to choose the right stocks for the Wheel Strategy, since not every company is suitable, especially those 100x volatile stocks.
We’ll discuss:
What makes a stock ideal for the Wheel
Why liquidity and options volume matter
Why some high-premium stocks should be avoided
And how to build a reliable watch-list
Choosing the right companies is one of the biggest drivers of long-term success with this strategy.
Once again, thank you all for taking the time to stop by and read. If I’m helping just a single person out there, then I’m satisfied! :) Thanks for reading everyone! Happy trading!
– HL Financial Strategies