Trading Plans
Options Trading Plan: The final plan is for a more experienced investor
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