About two months ago, we talked about an options trader having a commitment to excellence. This time we’ll go over why an options trader needs a trading plan and how to go about writing one. This is the part nobody wants to do. Most options traders think that their trading plan is in their head and all I need is a proper options education. “I know what I need to do when I need to do it” most beginning and some veteran options traders will exclaim. If it was just that easy, everyone would be a great options trader. Unfortunately it’s not. That is specifically why you need a written options trading plan. Just because you know what to do doesn’t mean you will do it.
Before you even begin to write your options trading plan, you must take an inventory of yourself. What are your strengths and weaknesses? You must take the time to truly examine yourself and be honest about whom you are. Your options trading plan must match your personality.
The first thing you need to do to start your options trading plan is to write down your goals like we talked about last time. Once you do this, it brings everything into perspective. The same reason you need to write down your goals is the same reason you need to write down your options trading plan-so your thoughts are transformed from the subconscious to the conscious. It doesn’t matter if you write the plan on a nice piece of paper or a cocktail napkin. It just needs to be written down in your own words.
The next section of your options trading plan will be money management. This is one of the most crucial and often overlooked components of successful options trading. How much are you going to risk per trade? What are your weekly or monthly profit targets? What are the maximum losses you are comfortable with on a daily, weekly or monthly basis? All of these questions need to be answered right in this section.
Strategies will be the next component of your options trading plan. This will be the meat and potatoes of the plan so to speak. A thing to consider is to start with relatively a few simple strategies (long calls and puts) and master them before you write in more complex option strategies into your plan. You need to describe in as much detail as possible the strategy you intend to use. You will probably be making constant changes to this part until you get exactly what you want.
The last section will be the follow up and review. This is when an option trader needs to print out the charts and the option chains and review them. Did I follow my written options trading plan like I said I would? This needs to be done when the market is closed so all your attention can be on the review. You must keep a trading journal and must always acknowledge your winners and more importantly learn from your losing trades.
This is just a general outline of an options trading plan to get you started. We will go into more detail in each area in upcoming features.
Senior Options Instructor