The 6 Step Entry Checklist – A Winning Options Trading Plan

Humans are creatures of habits. All options traders make mistakes at some point but the sad part is that most of these mistakes can easily be avoided.

Here, we will shed some light on the top 6 things, all traders should check when they are about to go into this battle.

These are the fundamental strategic steps that can help traders make more conclusive moves at the time of filtering and picking profitable trades.They are positioned in suitable order that can help you to easily point out if a trade is worthy for you or not.

Need Of Trades and Portfolio Fitting

Before going for a new trade, the first thing to be evaluated is the need of a trade and whether it fits within your present portfolio. If you are currently having 15 bullish trades, you perhaps don’t need to have any more bullish trades at that point time.

The important thing to consider here is looking for those trades that can add balance and reduce your risk. So, you probably need bearish trades to bring equilibrium to your trades.

Checking For Liquidity

This is a speedy method to recognize good, profitable stocks and everything else. Normally, the underlying stock should have to be traded 100,000 shares each day.

Such efficient and huge markets indicate that probability calculations will be more accurate with the passage of time.

We incline towards the strikes we are exchanging to have no less than 1000 contracts of open interest for the underlying options.

This will help in minimizing the ask/bid spread and will ensure the market has enough liquidity to get in and out of a trade fast.

Implied Volatility Percentile

IV percentile can simply be defined as a measure of implied volatility versus its past values. Now, once you have shortlisted potential setups that are fitting your portfolio and stocks that are having good options liquidity, it’s high time to check, if the implied volatility is comparatively low or high.

This relative ranking can be measured with Implied Volatility Percentile or simply IV Percentile. For instance, if currently IV of INTC is 35% but its IV percentile is 75%, then, it implies that more than 75% of the time over the last year, volatility will be lower than it is at the present time at its current actual IV which is 35%.

This measure proposes that implied volatility of INTC is relatively higher and you should center on premium-selling strategies.

Similarly, if implied volatility of AMGN is 35% but its IV rank is 20%, then 20% of the time over the last year IV was lower than its current actual implied volatility which is 35%.

It implies that you have an 80% chance that implied volatility will increase on average; it shows that AMGN has relatively low IV and you should prefer to be a net buyer of options.

Selecting Your Options Strategy

The best way to select your options trading strategy is by eliminating the bad ones. Once, you have gripped a strong knowledge of implied volatility percentile, you can know easily eliminate all those trading strategies that can cause financial damages.

For instance, if option pricing is rich and its implied volatility is high, you should eliminate option buying strategies like long single options and debit spreads.

So, you are left with, strangles and credit spreads. Hence, enabling you to pick the strategy that perfectly fits the size of your account and risk tolerance.

Strike Price & Timeline

Now, after selecting the best trading strategy that fits the current market situation, you can place your trades at a probability level that you deem fit. One of your ideal strategies can be selling credit spreads below the current market.

Suppose, selling them at strike prices that can give 85% chances of profit or at strike prices that can give 65% success chances. Here, the first trade is more aggressive than the second one but in both cases, you can make high probability trades.

At this point, you must also ensure to give yourself enough time to let the trade work for you. As a general rule of thumb, you should place high implied volatility strategies between 1-2 months out and low implied volatility strategies between 2-3 months out.

Position Sizing

Position sizing is that key area where both new and experienced traders usually go wrong. Go with small positions on a sliding risk scale from 1-4% of your balance per trade, as it is proved by numerous studies that trading big options can lead you to blow up your account and eventually lose all your money.


— The Option Specialist

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About the Author: The Option Specialist