|
In this week’s article I would like to share with you some ways to construct a trade plan that I have found very helpful – helpful in forcing me to know exactly what I'm doing and what moves I'm going to make, when. The example I will share is hypothetical and not a sample of a real trade in the future or past.
I like to start with a summary of the trade, the underlying and the overall details:
| Description: |
Butterfly |
| Instrument: |
S&P 500 – SPY |
| Settlement method: |
American Styled, Stock settled. |
| ROI Expected |
20% |
| Construction: |
ATM Put Butterfly |
| Time Frame: |
28 – 49 days from expiry
|
| Expiration Month: |
June 2012
|
| Entry Date: |
May 20th 2012 (AUS) |
Days to Expiry: |
Approx 31 |
| Support: |
110 |
Resistance: |
130 |
I then like to note the opening moves, how I will place the trade, how I will try to get filled.
Opening:
Construct the fly with a 20 point mouth, or strike widths of 10 points. Do not OPEN a brand new trade under 25 days to expiration unless the desired Risk to Reward can still be achieved, but certainly add to or adjust existing trades.
Trade Size:
Don’t open trade right before a Fed announcement or the release of any other major US data. Start trade at only 1/3rd the max risk I’m prepared to take, and then add more pieces to the trade if the underlying keeps with my prognosis.
Order Notes:
Shave the price to 10 cents under the midpoint of the bid / ask spread of the fly. Place the order as a ‘Day Only’ order. If filled place another order to sell the spread at my desired profit price.
Loss Stop:
If the SPY goes outside my breakevens for 2 consecutive days, close the trade. Work out from the risk graph how much loss that would actually be and if too much, tighten the parameters.
Profit Stop:
Once the spread has made 20% profit close the trade. This will be taken care of automatically if I use the automated order system on my brokers platform.
| Entry debit: $300 |
Max Profit: $700 |
Max Risk: $300 |
| (after trade is placed) |
| Trade Greeks: |
Delta: 1.2 |
Gamma: -0.3 |
Vega: -4.5 |
Theta: 3.2 |
|
(after trade is placed)
|
Trade adjustments:
Here I would list any trade adjustments I could do to lock in profit, take out risk, or even change the risk profile of the trade should my prognosis change on Direction, IV or Time.
Closing the Trade:
Here I state the circumstances under which the trade was closed:
- Why?:
- How did I feel?:
- Index Price at closing:
- Profit / Loss:
- Commissions:
- % Return on Risk:
- Time Period:
I hope this template will help you in planning your trades more effectively and sticking to the plan you make. Mapping out your trades this way also checks you know exactly what you're doing and is a good log for looking back at past trades.
Manage your trade plan!
Matt Baker
|