Portfolio heat is simply the total amount of capital you have at risk across all your open positions at any given moment. If things go sideways on multiple trades simultaneously — which happens more than you'd think — portfolio heat tells you how bad the damage could actually get.

Let's make this concrete. Say you're running the wheel on AAPL, NVDA, and Ford (F). You've sold a cash-secured put on AAPL with a $170 strike, one on NVDA at $420, and one on F at $12. Your maximum risk on each trade isn't the premium you collected — it's the full assignment obligation. That's $17,000 on AAPL, $42,000 on NVDA, and $1,200 on Ford. Add those up and you've got $60,200 sitting in potential exposure. That's your portfolio heat.

Most traders with a $100,000 account would look at that and think they're fine because they have the cash to cover assignments. But here's where it gets interesting: what if all three stocks drop 20% in the same week? That happened in March 2020. It happened again in late 2022. When correlation spikes during a market panic, your "diversified" wheel positions can all blow up at once. Suddenly you're not managing three separate trades — you're managing one giant losing position that just happens to have three tickers.

How much heat is too much?

There's no universal answer here, and anyone who gives you a hard rule without knowing your account size, income needs, and sleep schedule is guessing. That said, most experienced wheel traders I've talked to try to keep total portfolio heat somewhere between 30% and 50% of their account value in normal market conditions. If you're running $100k, that means no more than $30k-$50k in total assignment obligations across all open positions.

Personally, I'd lean toward the lower end — around 30-35% — if you're trading in a choppy or uncertain market. You can always add exposure when conditions improve. You can't easily undo a margin call.

The sector concentration problem

Here's a mistake that's easy to make without realizing it. You sell puts on NVDA, AMD, and SMCI because you know the semiconductor space well. Each position looks reasonable on its own. But your portfolio heat isn't just about dollar exposure — it's about correlated exposure. Those three stocks will move together when the sector gets hit. You might as well have tripled your position in one stock.

A better approach is to spread your heat across uncorrelated sectors. Combine something like NVDA (tech) with a consumer staples play like KO or a financial like JPM. When tech sells off, consumer staples often hold up. Your heat stays the same on paper, but your actual risk of simultaneous losses drops significantly.

Tracking it in practice

You don't need fancy software for this. A simple spreadsheet works fine. For each open position, note the ticker, the strike price, and the number of contracts. Multiply strike × 100 × contracts to get your max assignment obligation. Sum that column and divide by your total account value. That percentage is your heat reading.

Check it before you open any new position. If you're at 45% heat and you're thinking about selling another put on TSLA, you need to ask yourself whether the premium justifies pushing your heat higher. Sometimes it does. But you should be making that decision consciously, not stumbling into it because a trade looked attractive in isolation.

When to turn down the heat

Certain market conditions should make you more conservative. When the VIX spikes above 25-30, premiums get juicy and it's tempting to sell more puts to collect that fat premium. But high VIX means high realized volatility is likely coming — the market is telling you something. That's exactly when you should be reducing heat, not adding to it. The premium looks great right up until the underlying drops 15% and you're sitting on a position you didn't want.

Earnings season is another time to watch this. If you're holding positions across several companies and a few of them have earnings coming up, your correlation risk temporarily spikes. Consider closing or reducing some positions before that window to keep your heat manageable.

One thing you can do right now

Pull up your brokerage account and list every open short put or covered call position you have. Calculate the max assignment obligation on each one — strike × 100 × contracts. Add them all up. Divide by your total account value. If that number is above 50%, you're running hot and you should think about which positions to trim or close before the next market hiccup finds you overexposed.

Managing portfolio heat isn't about being timid. It's about making sure a bad week in the market stays a bad week, not a bad year.