Trading Plan - Trade for a living, invest for life   
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Trading Plan Options

Options Trading Plan: The final plan is for a more experienced investortrading plan for options by anna who is planning on trading options online to develop an income generating business based on US equity options using covered calls and straddles. As you will see the basic elements of the plan are the same, despite the fact that this is a more complicated instrument to trade online. It is simply a case of writing the plan according to the instruments you are trading. Each will have their own peculiarities, and you can add as much detail to the plan as you like - it is up to you and how you like to work. This is in fact a plan I have used myself for trading options online, so I can assure you it works! - if you would like to use it yourself, please feel free to use it as it is or amend it to your own trading style.

Online Option Trading Plan

My Online Options Trading Plan

My Overall Objective

The plan is to create a minimum income before tax of £5000 per month, using a 3% per month growth target. The plan is to achieve this within 2 years using a combination of income and capital growth strategies. I plan to start with £25,000 but to increase this as required.

My Strategy

I plan to trade full time predominantly using technical analysis tools, trading on short to medium term positions using equity options in  the US  markets. My strategy will be twofold. Firstly writing covered calls using a buy write strategy for income on low volatility stocks, and long straddles for capital growth on high volatility stocks. The risk profile will be low to medium

The Financial Instruments

For writing covered call options I will buy  US stocks and write call options to generate income on a monthly basis and look for a limited risk and limited reward profile. For long straddles I will also use the US options market, but with a limited risk high reward profile.

Options/Stock Selection

I will use the following strategies to select prospect stocks/options :

1. Covered Calls

Limited risk and reward
Option stock on charts
Neutral to mildly bullish with the possibility of writing monthly options for the next 3 months
Check volatility IV current vs. HV past of stock/options
HV current vs. HV past
IV current vs. IV past
Look for 2-3% premium
Find options 1 or 2 strikes OTM (out of the money)
Look for OTM option with 1 month expiry and 3% return
Minimum average daily volume 300,000
L Look for minimum open interest of 1000 contracts
Check main indices
Check sectors for stock
Check VIX
Check shares date for announcements/results/dividends
Make sure no announcements within the call period
Check implied volatility and historic volatility
Check for insider dealing
Check volume
Look for support/resistance levels for setting stop loss
Check national and international news, govt. announcements

 2. Long Straddles - Options

Limited risk high reward
Option stock
Consolidating - identify stocks which are consolidating prior to some sort of announcement. Only trade stocks which are showing flags, pennants, or triangles in the charts.
Check volatility and only trade on the following signals:
IV current < HV past
HV current < HV past
IV current < IV past
Look for possible news events such as earnings etc

Trading Rules

1. Covered Call Options

Always have a stop loss on the stock
Stop loss to be placed at the same time as opening the trade
Never write naked call options
Maximum loss per trade £375 or $650
Write OTM calls only, on new opening positions
On rolled over contracts writing ITM calls is fine
Only write one month expiry contracts
Only write one contract
Never have more than two stocks per sector

2. Long Straddle Options

Only trade single contracts
Buy at least 3 months out as a minimum
Exit straddles before expiry - minimum to expiry 3 weeks

Money Management

Initial capital is £25,000
Monthly profit target of 1%-3%
Maximum loss per trade 1.5% ( £375 or $650)
Exclude any income from calls - actual loss will generally be less than the maximum as income from the calls will offset this loss, and exit strategy on long straddles will guarantee residual value.
Trade size to be governed by loss size
Maximum of 20% capital at risk at any one time - equivalent to 13 open positions at any one time.
Margin account at 50% - equivalent to 25,000 USD

Note : given the initial capital level in order to achieve the objective we will need to increase the trading capital to £100,000 by adding an additional £75,000. With the margin account this will give us a trading facility of $400,000 approx. ( see spreadsheet )

Trading Records

Stock bought or sold
Option details and premium
Position of stop loss
Time and date trade opened
Time and date trade closed
P/L on the trade
Option expiry date
Reason for entering trade
Reason for exiting trade
Daily trading diary
Weekly summary of overall account position including cash in the account and open positions.
Weekly summary of the total capital at risk
Monthly P/L summary of all closed trades

OK - that's all on online trading plans - I hope you have found this site useful and I am developing others on a whole range of trading subjects so please check back from time to time. Good luck with your trading, and please remember, a trading plan is vital to your success. I hope the above has helped you to understand how to write one, and remember they do not have to be as complicated as the one above - a simple plan is better than none at all.

Good luck and thank you for all our kind comments about the sites and please write some trading plans, even if they are only simple - a simple trading plan is better than none at all!! - best wishes - Anna