Welcome back to the Rookie Blog! In this series of the blog we have been going over all the things we need to think about before we get into a trade. We also are looking at what needs to be done after the trade goes on. We have looked at a few different types of strategies and how they differ in what planning is required for those particular types of trades. This week I want to make it a little easier to see what we are looking for when building our trade plan.

This week we are going to look at the naked put strategy. This is a strategy that is very popular with many newer traders but there is a lot of things that can slip by if you do not put in the work or the time to visualize the entirety of the trade. I know a lot of folks get the urge to jump on a good looking setup and sometimes don’t really consider what can happen if the trade turns bad and this is what we are trying to prevent by planning for any events that may haunt us.

Let’s take a look at the pre-trade list of things that we need to consider in our trade plan.

PRE-ENTRY Considerations

Trend – this is a bullish trade so we need a bullish or at least a neutral trend.

Time – How much time are we going to stay in this trade? What expiration will we sell?

Pattern – We are looking for a bullish breakout or retracement, both with confirmation.

Sub-Patterns – bullish patterns such as cup and handle, ascending triangle, etc

Support/Resistance & Price Levels – we need to know these levels because this is where we will build our entries and plan our exits

Volume – we need stocks that are liquid but also ones that people are participating in

Momentum – we want to ensure that we are going to continue in the right direction without something obvious getting in our way. This can be seen on indicators or through price movement.

Sectors – “birds of a feather flock together” we want the sector and index and the industry groups to be ideally moving in the same direction, this will increase the chances that it continues to move in the manner we expect

Personal Rules – for each strategy we must have rules and we must be disciplined in using them. If your rule is selling a .40 delta, 30 days out then stick to the rules.

Position Sizing and Leverage – this is where we start to switch our mindset and start thinking about what can go wrong instead of all the things from above that line up to look right. We need to ensure that we don’t put ourselves in danger of blowing out our account just because we have all the above items in our favor.

POST-ENTRY Considerations

Key Levels – These are inflection points where action needs to be taken. If you are using a stop loss on the trade then you need to plan what that key price level is that you will exit the trade. If you are going to hedge the trade then it is at these levels where you must take action.

Hedging Techniques – if you are using a hedging technique, what is it and what means will you need to employ? If you are using stock to offset a postion the you will need to know how much capital you will have to have at any given price point.

The Greeks – this is where you need to nail down what the problem with the trade can be, if time is working against you then you have to have a plan to deal with theta, this could entail selling options and you must know what your theta number is and how many options to sell to offset and also how this affects the delta of the trade? Also what happens if vega increases or decreases? You need to plan for this as this happens all the time, sometimes there will no effect and sometimes the effect will be massive. You can solve all this by studying the risk graph.

Reversals – you need to plan for the trade going against you but what happens if you adjust the trade and then it reverses and continues on the path you expected it to go? Do you have a plan for this, how will it affect your original trade and the adjustment?

From this list, I think you can see there are many considerations when it comes to placing a trade. This list may seem daunting at first but after some practice and study this will become second nature. Check out the video to see what it looks like to run through the list on a naked put trade and more importantly why its important to think and plan these things out ahead of time.

Trade Well,

Coach Holmes