Options Trade Strategy Selection

To select your strategy, below are some useful questions

  1. Which market(s) are you going to trade?
  2. What is the direction?
  3. What is the time frame?
  4. What is the volatility of the underlying and its options?
  5. What is the risk/reward?

Risk Management:

Before the trade:

  • What is the risk/reward ratio of this trade?
  • What is the probability of success?
  • What is the maximum loss acceptable for this trade?
  • What is the expected return and target profit of this trade?
  • Does the new trade maintain the balance or diversification of the portfolio?

During the trade:

  • Has the trade reached the maximum allowed loss?
  • Has the trade reached the target profit?
  • Is the reward of keeping the trade open worth the risk?

After the trade:

  • Did you follow the risk management rules on this trade? If not, why?

Tips on risk management:

  • Create a money management policy
  • Define a position sizing policy
  • Maintain a diversified portfolio
  • Adjust the trades or exit when it goes bad
  • Buy portfolio insurance to protect against black swan events

 

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