How much of your account to put at risk selling spreads

The table

We took 129 real months of put credit spread returns on QQQ and SPY (25-delta short, 5% wing, 30 to 45 days to expiry, 2016 to 2026, three bear markets in the sample) and resampled them in contiguous blocks to simulate a year, keeping the way losses cluster. The percentage is the share of equity at risk in spreads at any one time.

At 5%: median year +4.1%, chance of a 20% drawdown 0%. At 10%: median +8.1%, 0%. At 15%: median +12.1%, 3.3%. At 20%: median +16.1%, 14.9%. At 30%: median +24.6%, 38%. The fifth-percentile year at 30% was -18.2%.

Kelly says much more, and it is the wrong guide

The growth-optimal Kelly fraction on the same monthly series was 0.70, and half-Kelly 0.35. Both sit at or beyond the 30% row, where the odds of a 20% drawdown within a year were 38%. For a seller who cannot tolerate that drawdown, the drawdown limit, not Kelly, is the binding constraint.

A separate model on cash-secured puts reached the same shape: collateral equal to 75% of equity carried about a 1.9% chance of a 20% drawdown in a year; 3.4 times equity, about 21%; 4.5 times equity, about 31%.

Why the curve bends so fast

Spread losses are lumpy. A bad month is several positions on correlated underlyings reaching maximum loss together, so the drawdown grows faster than linearly in the fraction at risk. The win rate barely changes across the table; what changes is how many bad months it takes to cross 20%, and at 30% one or two can do it.

This also means the table is per factor, not per ticker. Two spreads on QQQ and a 3x Nasdaq fund are one exposure for this purpose, as the lesson on correlated tickers explains.

What it changes in practice

Pick the drawdown you can live through first, then read the fraction off the table. On this evidence, about 10% to 15% of equity at risk per factor kept the odds of a 20% drawdown low, while 20% and up made it a regular event. These figures come from a bull-heavy decade with three bears; a different future could be worse, which argues for the lower end. The put credit spreads guide covers how the structure itself is built.