How to diversify

Hello, I've been selling put credit spreads on the SPX but both napkin rules and Kelly Formula tell me to only risk abt 5% per uncorrelated trade. I feel okay enough diversifying across broad / macro classes (like, 5% SPX, 5% GOLD, 5% BOND) but I'm wary of stacking trades within the SPX -> 5% NVDA, 5% PLTR and 5% TSLA feels like just doing 15% SPX. My thoughts here are to either just lower the capital allocation per individual stock or to keep it high and buy a put on the index for correlation protection. The first solution doesn't help me maximise my capital at risk as much and the second feels like it erodes premium. I'm not sure if I'm overthinking or chasing a free lunch or both. Advice muchly appreciated 🙂‍↕️.

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u/Pale_Still3462 1 4 days ago

youre chasing a free lunch my friend. the moment you buy that index put you just giving back all the premium you collected, maybe more if you really wanna diversify, look outside US equities entirely. different underlyings, different exchanges, different currencies. i know a guy who sell strangles on brazilian index and it barely move with SPX most days
u/klipsetrades 1 4 days ago

I think one possible mistake could be assuming that every position needs to use the full 5%. If the trades are highly correlated, I’d size them as one larger risk bucket and divide the exposure between them. Personally I’d rather reduce size than constantly buy index puts against correlated credit spreads. Cleaner risk management, less drag, and you know your max exposure going in
u/thetalentedmrbowser 1 4 days ago

I haven’t done it myself but futures options on oil, natural gas, corn, cattle, etc have a lot of liquidity and are inverse or uncorrelated. There’s also FX trades - could be a lot to keep track of though depending on how active your trading is.