Building a Winning Options Trading Plan

A good Options Trading Plan can act as your own personal decision making tool, helping you decide what, when and how much you should trade.

One popular question asked  is “How do I make $100 per month?” We sell options in order to receive options premium.

While there are no guarantees in trading, this segment helps a trader run through the math in order to get a ballpark estimate.

There are several factors to consider: The Option Premium that you collect, Profit targets, Strategy success rate and drawdowns. Let us elaborate more about the different factors.

1) Option Premium collected

We use options selling strategies to collect option premium. Let us start with a small amount of profit as an example. Then you can easily scale it to your desired size. If we wanted to make $100 a month, we will need at least $100 in option premium.

We don’t take risk if we only can make a few pennies each trade.  We seek for options that have enough premium. When you sell a strangle in the SPY The average credit for 30 days to expiration will be $1.25. So whether the volatility is high or low you could collect a $125 on average.

 

2) Profit Targets

Many times markets turns a profitable trade can turn into a loser. Research shows that you make more money when you take profits early. If we manage at 50%, we will need at least double the amount we want to make. Taking the example if you manage at 50% you only expect to make $62.5 per strangle.

 

3) Strategy Success Rate

Every strategy has it owns success rate. When you buy stocks you have 50% chance to make profit. If you sell options your can apply strategies with a much higher probability of success.  Depending on the success rate, we will need to take that into consideration. If a strategy (strangles) has a success rate of 90%, then we will only have success (on average) in 9 out of 10 times.

 

4) Draw downs,

Draw downs, magnitude, and frequency of losses should always be taken into consideration. We like to capping losses at 2x the credit received. We exit the trade when we lose 2x$125=250. Because the expected draw down is $250 with a 10% likely hood of a loss, an expected profit can be calculated. This will include the winning and losing trades. (62.5×90%)-$250×10%)=$31.25

If you like this strategy watch the episode of options jive Tasty Trade.

If you want to generate an average of $100 per month you have to generate $13-$14 theta decay per day. Whatever number you like to earn you have to multiply it with 4. So you basically have to sell $400.

Create your own options trading plan to create Consistent Profits Sell Options to receive premium. The plan is for people with small portfolio but you easily can scale it up if you want to trade a large portfolio.

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