It seems like I always get asked about how I conduct my trading day. Clearly, a lot of factors go into that decision, but there are more than just a few constants. Here are several in an abbreviated form to give you something to chew on for your trading plan.
General Market Conditions
Take into account what the general market is doing as a whole. I would rather be on the right side of the market more times than not. If the market is bullish, maybe look for more bullish trades. Then scan for opportunities based on charts using several different time frames. I like to break down the market by bullish, bearish, neutral, non-bearish (more bullish than bearish) and non-bullish (more bearish than bullish).
At the Market Open
Do any current positions need to be tended to? Do mental stops need to be changed and do you need to use new profit taking orders? Does your watch list need to be updated? Since I like to trade long time spreads, I also look to see if any implied volatility skews are present so I can consider calendars as a potential strategy. Once again, you can scan charts to confirm possible opportunities either from your watch list or the pre-market scan and look for new opportunities as well.
This part is easy but often forgotten, even by me at times. Check for expected announcements including earnings. In addition, do the options have acceptable bid/ask spreads? Once those two things are confirmed, consider going to the next step.
How many contracts are you considering? Will this be the same if something changes on the charts or maybe strategy wise? Consider breaking it down in three ways: nibble-size, half-size and full-size contracts. Do you fully understand the risk-reward for the trade based on your size?
Is There a Trigger?
I like to tell option traders to have a plan in place before entering the position. So…do you? Is the trade ready to go now or do you need confirmation down the road? I like to enter most directional trades based on the close. Do any of your current positions need revisiting?
Into the Close
Do you need to do something or attend to a position before the close? Are any potential trades triggering? How about risk? Are there any positions where you can reduce risk from your portfolio?
Step back and relax. Get away from the computer and consider exercising and/or meditating. This of course can be done at other times too. If need be, prepare for the next day after you have taken a break. That is very important in my opinion. Don’t forget to take a break!
Take some time off as needed when doing poorly and when doing well. Time away from trading is always a good thing. When the market is closed, do two things. The first one is to review previous trades and the second is to continue to improve and work on your personal trading plan. Of course, this was a very short and simplistic approach to how I handle my options trading day. But I hope it will give you some food for thought for not only your trading day but also your trading plan!
Senior Options Instructor