Options Trading Plan
Now is the time to focus on developing your options trading plan. Before you start, consider several things: Each person’s options trading plan is highly personal and unique to their personality, temperament and financial situation. You may wish to paper trade for six months before you put real money on the line. How much money do you have to capitalize this business? You do not want to use all of your nest egg, only use a portion of it. You should pre-calculate how much cash you would need to secure a potential put sale or a stock purchase against which to sell call. Do you have that much cash available? Are you more attracted to put-selling or covered calls? Why? What is your view of the general market? How does that affect your thinking? Do you already own at least 100 shares of stock? If so you can begin by selling calls on these. Once you have considered these points you are ready to construct a written option trading plan. This written plan is a blueprint that will guide your business. Do it before you start going live. Your plan should outline the following:
1. Will you enter into covered calls or cash-secured puts? 2. How much capital are you prepared to commit to this business? 3. What would cause you to exit your position before expiration? What is your absolute stop such that if the market moves adversely you will get out of the position no questions asked? 4. For covered calls when will you put a protective collar on you position if at all? 5. Will you be entering into the next month’s options so that time decay works to your maximum advantage or will you sell options two or more months out to capture higher premiums? 6. How will you determine good option-selling opportunities? Will you use stock-chart analysis?
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