Last Update: August 2021

I’m not an engineer, nor a big math guy. Once upon a time, I signed up for an online, self-study Calculus class in college. I paid the tuition and bought the book. When it arrived, I promptly scanned through the first chapter and discovered I was delusional.

There was a less than zero chance I was going to be able to teach myself.

It takes a special kind of Mo-Ron to spend a few grand to discover his idiocy 🙂

But here’s the funny thing. I actually like basic math and logic. It helps me make money as a trader and bring order to what could be chaos. I enjoy articulating phrases as formulas. It allows me to simplify things. Take the following sentence, for example:

When markets are volatile and bid/ask spreads blow out, I avoid trading options for a spell.

Here’s how it looks as a formula:

Volatile market + Wide bid/ask spreads = Don’t trade

Or, how about this one?

When an uptrend pulls back to support on light volume and has an attractive risk/reward ratio I sell bull put spreads if implied volatility is high.

If we formulize it:

Bull Retracement + High IV = Bull Put Spread

Both examples illustrate how you can apply formulaic thinking to your trading plan. There are many angles of attack with how to explain constructing a plan, but one that I prefer is highlighting core setups and strategies.

Core Setups

Think of these as the criteria that must be present before you place a trade. For a trader like me who basis his decisions primarily on the posture of price charts, these are the patterns I look for.

• Retracement, Breakouts, Overstretched, High IV Rank

Since the first three have a bullish and bearish variation, that means there are seven core setups that I trade. Virtually every single selection in my weekly Options Report will be one of these patterns. The only exception I can think of is if I highlight an earnings play. Those belong in a category all by themselves.

Have you identified your core setups? If you haven’t then I bet you flounder and waste time finding trade ideas.

Core Strategies

Identifying which trade setups you will play is the first step. The second is to determine what your core strategies are. This list will grow over time as you learn more advanced strategies. Here’s a simplified version of mine:

• Bull: Long Call, Bull Call, Naked Put, Bull Put
• Neutral: Short Strangle, Iron Condor
• Bear: Long Put, Bear Put, Naked Call, Bear Call

By having more strategies, I can be more precise in the way I structure risk. Sometimes I may want to go for a lower probability, higher reward play. Other times I may stick with a higher probability, lower reward play.

The other factor that comes into play is implied volatility. For the newcomers in the class, this is the variable that tells us if options are cheap or expensive. I categorize which strategies are best based on the implied volatility levels.

• High IV Rank: Naked Put, Bull Put, Short Strangle, Iron Condor, Naked Call, Bear Call
• Low IV Rank: Long Call, Long Put, Bull Call, Bear Put

Formulize It

This is where the fun begins. I can now each scenario I’m willing to trade as a formula. I could probably create a dozen-plus of these, but a few examples should be sufficient to inspire you.

• Bull Retracement + High IV + Cheap Stock = Naked Put
• Bull Retracement + High IV + Expensive Stock = Bull Put
• Overbought + Low IV = Put Calendar
• Oversold + High IV + Expensive Stock = Iron Condor
• Oversold + High IV + Cheap Stock = Short Strangle

Now.

Go.

Create.

Your.

Own.

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