“Magnitude of losses and profits is purely a matter of position size. Controlling position size is indispensable to success. Of all traits necessary to trade successfully, this factor is the most undervalued.”
Joe Ritchie
Q. When did you first get involved in trading options?
A. I did a little dabbling with stock options back in 1975-76 on the Chicago Board of Options Exchange, but I didn’t stay with it. I first got involved with options in a serious way with the initiation of trading in futures options. By the way, in 1975 I crammed the Black-Scholes formula into a TI-52 hand-held calculator, which was capable of giving me one option price in about thirteen seconds, after I hand-inserted all the other variables. It was pretty crude, but in the land of the blind, I was the guy with one eye.
The Most Undervalued Insight in Trading
Ritchie’s opening statement is not a platitude. It is a precise and counterintuitive claim: that the magnitude of any trading outcome, whether a large profit or a large loss, is determined not by how good or bad the trade was, but by how large the position was. A trade that is directionally correct but oversized can destroy an account. A trade that is directionally wrong but correctly sized produces a loss that the account can absorb and recover from.
This is the same logic that runs through the TurtleTrader rules. Every entry in the Turtle system began with a defined maximum position size, calculated relative to the volatility of the market and the total equity in the account. The direction of the trade was secondary to its size. Get the sizing wrong and the quality of the entry signal is irrelevant. Get the sizing right and even a losing trade is a manageable event. Ritchie identified this as the most undervalued factor in trading, and the research literature on trader failure has since confirmed his observation at length: overtrading and oversizing are the primary causes of account destruction among traders who understood their strategy but failed to size it correctly.
Black-Scholes on a TI-52 in 1975
The Black-Scholes options pricing model was published by Fischer Black and Myron Scholes in 1973. By 1975, Ritchie had programmed it into a TI-52 handheld calculator and was using it to price options at the Chicago Board Options Exchange. The calculator produced one option price every thirteen seconds after manual variable entry. That was not fast by any modern standard, but in 1975 it represented a genuine computational advantage over traders who were estimating option values by intuition or by simpler approximations.
The phrase “in the land of the blind, I was the guy with one eye” is the most precise description possible of what it means to have a systematic edge in an immature market. Ritchie was not claiming to have had a perfect model. He was claiming to have had a better model than anyone else he was trading against. In a market where most participants were pricing options from gut feel or rough rules of thumb, a trader with a hand-calculated Black-Scholes price had a structural advantage on every trade. That advantage was not perpetual. As the options markets matured and more sophisticated pricing tools became available, the computational edge eroded. But in 1975, the edge was real and Ritchie was exploiting it.
Joe and Mark Ritchie: The Family Connection to the Chicago Pits
Joe Ritchie’s connection to the trading world predates his own options career. In the early 1970s he was working for a silver coin dealer in Los Angeles and came to Chicago to explore the possibility of setting up a silver arbitrage operation between the Chicago and New York markets. He brought his brother Mark Ritchie along for the trip. The moment they heard the opening bell and saw the pandemonium of the trading floor from the visitors’ gallery, both brothers decided the exchange was where they belonged.
Mark went on to become a New Market Wizards trader in his own right, profiled by Jack Schwager alongside Joe. The Ritchie brothers are one of the few sibling pairs in the Market Wizards literature, and their shared origin story at the Chicago Board of Trade illustrates something important: the trading world in Chicago in the early 1970s was accessible to people who showed up with the right combination of mathematical aptitude, risk appetite, and willingness to learn. The barriers were low. The edge was in the math.
Position Sizing, Options, and Trend Following
Ritchie’s career in options trading occupies a different part of the systematic trading spectrum from the trend followers who dominate the TurtleTrader literature. Options traders exploit pricing inefficiencies and volatility relationships. Trend followers capture directional price moves over time. The instruments and timeframes differ in important ways.
But the position sizing insight Ritchie articulates is shared across both approaches. Richard Dennis built position sizing into the core of the Turtle rules. Larry Hite described his entire approach as a defensive game where the first question was how much could be lost. Every serious systematic trader, regardless of the strategy, has arrived at the same conclusion: magnitude of outcome is controlled by position size, and controlling position size is the foundation of survival and long-term performance.
Frequently Asked Questions About Joe Ritchie
Who is Joe Ritchie?
Joe Ritchie is a Chicago options trader profiled in The New Market Wizards by Jack Schwager. He began trading stock options at the Chicago Board Options Exchange in 1975-76 and moved into futures options as that market developed. In 1975, he programmed the Black-Scholes formula into a TI-52 handheld calculator, giving him a pricing edge over other traders. He is the brother of New Market Wizards trader Mark Ritchie.
What is Ritchie’s position sizing insight?
Ritchie argues that the magnitude of any trading outcome, whether a profit or a loss, is determined by position size rather than by the quality of the trade. A correct trade in an oversized position can destroy an account. A wrong trade in a correctly sized position produces a manageable loss. He describes position sizing as the most undervalued factor in trading, and the most important single determinant of long-term success.
What did Ritchie mean by “in the land of the blind, I was the guy with one eye”?
He meant that his edge in the early options markets was not perfect pricing ability but superior pricing ability relative to his competition. In 1975, most options traders were pricing from intuition or simple approximations. Ritchie had a hand-calculated Black-Scholes value for every trade. That relative advantage, not an absolute one, was enough to produce returns in a market where most other participants had no systematic pricing framework at all.
How does Ritchie connect to trend following?
Ritchie’s position sizing principle is shared across options trading, trend following, and every serious systematic approach to markets. The TurtleTrader rules encode position sizing as the primary risk control mechanism. Larry Hite described his approach as a defensive game starting from the question of how much can be lost. Ritchie arrived at the same conclusion from the options world: control your size and you control your outcome.
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