Bill Poulos explains his simple to use five-part formula in the slideshow. The risk management formula can be used to limit potential risk when trading call options or put options.

4. MY OPTIONS RISK MANAGEMENT RULES ARE VERY SIMPLE BUT THEY'RE VERY
POWERFUL WITHOUT THESE RULES YOU CAN GET INTO A LOT OF TROUBLE

5. USE THIS TEMPLATE TO GO THROUGH AN EXAMPLE

6. ACCOUNT SIZE OF $10,000

7. DETERMINE THE PERCENT OF THE ACCOUNT SIZE WE CAN
RISK. FOR SMALLER ACCOUNTS LIKE 10,000 DOLLARS, YOU
CAN RISK UP TO 5% OF YOUR ACCOUNT.

8. ACCOUNTS LARGER THAN 10,000 AND UP WILL BE 2%.
FOR ACCOUNTS OVER $100,000 UP TO 1%.

9. 5% OF $10,000 IS $500. THAT'S THE PLANNED RISK IN YOUR ACCOUNT
DOLLARS. IF YOU LOST ON THIS TRADE THE MOST YOU WOULD LOSE IS $500.

10. HOW MANY OPTION CONTRACTS CAN YOU BUY? DEPENDS ON
THE PRICE OF THE OPTION. THE PRICE OF THIS OPTION IS $2.
EACH OPTION CONTROLS 100 SHARES OF STOCK OR ETF.

11. MULTIPLY $2.00 BY 100 SHARES AND $200 IS
YOUR COST PER OPTION CONTRACT.

12. YOU ONLY WANT TO RISK A
MAXIMUM OF 500. YOU DIVIDE THE
200 INTO 500 AND YOU GET 2.5.

13. YOU CAN'T TRADE IN
FRACTIONS OF A
CONTRACT SO WE
ROUND DOWN TO 2.

14. THAT DOESN'T SOUND LIKE A LOT BUT THAT'S
WHEN YOU START TO GET INTO BIG TROUBLE
YOU'VE GOT A PLAN FOR RISK FIRST AND
THEN GO AFTER PROFITS.

15. THANKS FOR WATCHING THIS SLIDESHOW.