Trading Business Plan
Objective: Achieve positive market returns greater than or equal to 15% annually in up, down, and sideways markets.
Plan: The objective will be achieved by trading options to leverage profitable trades while at the same time limiting risk and capital outlay. Technical analysis will be the primary tool used to time in and out of positions as well as aid in the measurement of risk vs. reward. Once stops and targets are identified using technical analysis those inputs will be fed into the option pricing model for profit/loss estimates. Options strategies will be chosen based on the current trend of the stock (up, down, sideways).
Assets Traded: The portfolio will be comprised of 100% options. They can however be options on either equities or indexes. If at any time the portfolio is assigned stock due to certain option positions taken in the market place, the assigned stock is to be disposed of in a timely manner. Trades are not to turn into investments.
Note: One exception is if the assigned stock remains in an uptrend and is in a pull back the trader can use his discretion to initiate a covered call strategy to exit the trade. This exception is only valid in the event that the total stop loss has not been hit.
Holding Period: 1 day and up to 90 days.
Position Limits: First the limits will be based off the assumption of a margin portfolio and will be in the context of the required margin to initiate the position. No single position can exceed 10% of the portfolio value at the time of initiation. Also max stop losses shall be set at no greater than 3% of the total portfolio value at the initiation of the position.
Initiating positions: Before any new position is added to the portfolio a detailed post and analysis must be completed and should include the following: Chart analysis, stop loss amount and corresponding stock price, target profit and corresponding stock price, option pricing model analysis, estimated holding period, current stock price at entry, position to be taken, and any key fundamental catalyst coming up. Optional: Company summary and sector.
Note: The one exception is if the intent is to day trade the option. Also all positions must meet the minimum risk/reward of 1:2. No Exceptions!
Performance: Trading performance will be measured against the stated goal of greater than or equal to 15% as well as compared to the key index ETF’s (S&P, DJIA, NSDQ). Results are to be tracked in the tracking file along with key metrics identified by the trader. These results are to be posted once per month on the blog for full transparency.
Resources/Ideas: IWO.com, IBD, Onn.tv, SMB blog, T3Live.com, CNBC.com, Stocktwits suggested, Google and Yahoo Finance, Schaffers.com, TOS platform, IB.
I think that I may want to add a time stop in addition the the max stop loss for the position. I notice that my most profitable trades are those that trade in my favor rather quickly after initiating. I am thinking somewhere in the range of 1-5 days as a time stop.
ReplyDeleteI think the important thing here is to remember that by your own admission this is just a first draft, surely to be upgraded/changed/bettered. I tried to keep in mind that it doesn't matter what I might want in my personal plan and to just look at yours objectively. That being said:
ReplyDeleteUnder the Objective/Performance headings, I think stating a measurement metric of quarterly versus the indexes and/or your yearly return should be added. Because otherwise how to you measure success of a 15% yearly until you have three years under your belt. Especially if you're going to have an options only portfolio where total value can be extremely volatile on a daily basis. You can have a 20% total portfolio return evaporate quickly even with stop losses in place. I would obviously look at the month-to-month numbers, but put more emphasis on the quarterly just as corporations and portfolio managers do.
Under the Plan heading, what are the secondary tools to be used and does gut feel have a place in trades or is it strictly technical analysis with secondary tools used only for confirmation of technical ideas?
Under Assets Traded, why limit yourself to only options? There are sure to be times when straight stock, deep in-the-money covered calls, or futures might be the better vehicle to use. I am with you in that my primary instrument is options, but I don't know that limiting yourself to options only is warranted. My only point here is that if one of the other vehicles turns out to be a better use for the desired goal than it should at least be considered, and it shouldn't be considered a breach of the plan if you did so. Example: a DITM covered call for a $15 strike is the same as selling a naked put at $15, but if for some reason the BxA were such that selling the DITM call gave you a lower cost average than selling the naked put, then why not do it that way. Theoretically this shouldn't happen but it does.
Under Holding Period, does this mean that anything more than 90 days would have to be classified as an investment and therefore executed in your separate account? Would you be allowed to sell a 6-month naked put as long as your intention was to close out within 90 days? Or does the time remaining at initiation have to be 90 days or less by rule?
Under Position Limits, according to your numbers, this means that a max position size of 10% of the portfolio can not run more than 30% against you as a 3% total portfolio loss equates to 30% of that max position size. So maybe something to consider as a check to yourself if doing a trade that large.
Under Initiating Positions, how does the ratio work? Are you looking for a minimum of $2 return for $1 of risk taken, or $1 of return for $2 of risk? Either way, does this mean you can't do something like sell an extremely out-of-the-money put for a 10% return because it doesn't meet the risk/reward profile? This sounds like your risk/reward profile is quit limited and only allows for higher risk trades and not a wider spectrum.
I'm going to use this as a template for a starting point on my own trading rules. I think under initiating a position I will add something like: Review trade idea to make sure it doesn't violate any rules in the trading plan.
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