Sizing Caps: 2–5% Per Pair

Two pairs have the same σ and the same entry and stop bands. Pair 1's A leg is $2,000; pair 2's is $5,000. How do their losses at the stop compare?

• They are the same, because the bands are the same
• Pair 2 loses 2.5 times as much
• Pair 2 loses less, because bigger positions are more diversified

The 1% rule allows an A leg of $700, the per-pair cap $500 and the depth cap $2,000. Which binds?

• The 1% rule
• The per-pair cap
• The depth cap