Developing Your Trading Plan
Every option trade begins with an outlook for the underlying stock. This is the first thing I try to emphasize with any trader embarking on trading options. It may appear I am repeating myself on this subject and that is because I am. I think it is also a good reminder for all levels of option trader. This outlook will have a timing component along with a price outlook for the underlying market. There also may be a forecast for implied volatility when there is a short-term trade that is expected to exit before expiration. However, even before a trade is established there should be some sort of overall trading plan.
The plan should help dictate from a high level what trades will be initiated. The components that will be dictated include what underlying markets will be traded, what strategies will be used, and how trading decisions will be made. The maximum amount of capital attributed to each trade would be known from the trading plan. Trading should be enjoyable to you, but the main reason you probably decided to focus on the markets or even buy this book is because you want to make money trading options. Any endeavor that is entered into to make a profit should be approached as a business. For a trader the trading plan is like their business plan.
This chapter will focus on developing a high-level trading plan that will be focused on trading short-dated options. The first decision to make will be what markets to trade. The next will be what ...