Avoiding Concentration Risk

In short

Concentration risk builds gradually through a series of individually reasonable trades, shown across four months where repeated cash-secured puts on one stock quietly grow to 40% of a $60,000 account.

Concentration risk almost never arrives as one deliberate decision. It builds trade by trade, until it's much bigger than anyone intended.

What concentration risk is

Concentration risk is what happens when a single position, company, or sector grows large enough that it alone could meaningfully damage the whole account.

A worked example of how it builds

A trader keeps selling cash-secured puts on XYZ, a stock they know well with premium they keep finding attractive:

Month	New XYZ puts sold	Total XYZ exposure	% of $60,000 account
1	1 contract, $6,000 collateral	$6,000	10%
2	1 more contract	$12,000	20%
3	1 more contract	$18,000	30%
4	1 more contract	$24,000	40%

Each decision looked reasonable alone — one more contract on a stock already understood well, at a premium that looked attractive that month. By month four, 40% of the account rides on one company, without any single trade ever feeling aggressive on its own.

Why familiarity makes this worse, not better

It's natural to keep returning to a stock you understand, at premium levels you recognize as attractive. That same familiarity is exactly what lets concentration build unnoticed — comfort with a name isn't the same as a plan for how much of the account should ultimately ride on it.

How to catch it

Position sizing, covered earlier in this course, addresses one trade at a time. Catching concentration risk means periodically stepping back and totaling exposure by company and by sector across everything currently open — not just checking each new trade against its own limit in isolation. The same dynamic shows up at the sector level even with no single company dominating: five different companies that are all, say, regional banks or all consumer retailers, can produce the same concentrated outcome as one oversized position in a single stock.

Key takeaway: concentration doesn't announce itself — it feels like a string of individually reasonable trades the whole way there. Check total exposure by company and sector periodically, not just once.

Last up: pulling all of this — sizing, max loss, reserves, diversification, concentration — into one framework for deciding how much of a portfolio belongs in options.

This lesson is educational content explaining standard options mechanics, not personalized investment or trading advice.