Position Sizing and Stop Losses

There are at least a couple of ways to manage risk using position sizing and stop losses.

For example, say I wanted to limit my maximum loss to 1% of total capital. I could use either of the following methods:

1. Using position sizing, I could limit the position to 1% of total capital.

2. Using position sizing and a stop loss, I could limit the position to 4% of total capital and set a 25% stop loss.

With method #1, I'd have less money invested in the position and therefore my return, in dollar terms, would be less. The position would have to lose 100% of it's value to reach the maximum loss, which is pretty unlikely unless the company goes out of business.

With method #2, I'd have more money invested in the position and therefore my return, in dollar terms, would be more. The position would only have to lose 25% of it's value to reach the maximum loss, which is more likely if the company missed earnings or the market as a whole was going down.

There are pros and cons to using either method. For my covered call positions I use method #1 and for my buy & hold positions I use method #2. One reason for the difference is that I can lower my cost basis in CC positions by selling call options, but with my buy & hold positions I can't. My new VICC positions are kind of a hybrid. They're buy and hold positions with covered calls, so I chose to use method #1.

Hope this makes sense.