2. What is a Trading Methodology?
A Consistent set of Rules and Procedures
A Framework to Analyze and Compare Opportunities
A way to review your Trades and Performance

3. Why Use One Instill Trading Discipline
Improve your Decision Making with Consistent Analysis
Control your Emotions
Basis for Analyzing your Performance
and to Simplify Trading!

4. Top Gun Options Trade Plan
Identify Target
Describe your Commit Criteria
Have a Clear Strategic Mindset
Engineer the Tactic
State your Tactical Employment
Lay Out your Mid-Course Guidance
Design your Exit Plan

5. Identify the Target
The Target is the Underlying Asset on which we are looking to open a position.
What makes a good Target?
Cleary Identifiable Opportunity
Understandable Situation
Definable Risks
Sniff Test – Is it too good to be true?

6. Advanced Targeting
Advanced traders understand that there is no edge in trading stocks and options that have a perfect, rational price. It is only when something is off that you can get an advantage in a trade. Train yourself to spot these situations and you will improve your trading immensely. Remember Hmmm = $$$

7. Common Targets of Opportunity
Over Priced Implied Volatility
Possibly the most common situation
Low Implied Volatility
Rare but easy to spot
Market Structural Events
New Option Series Issued
Expiration Friday
Company Specific Events
Earnings, FDA Announcements, etc…
Technical Setups
Opportunities to go long or short
Clear Support or Resistance

8. Commit Criteria
The Commit Criteria is a clearly stated justification for entering the trade. It should be a short description that defines the behavior we are taking advantage of to get an edge in this trade.

9. Advanced Commit Criteria
Define the reason for the trade. State what will happen that makes this a good trade. Include the following;
Price Changes of the Underlying Asset
Changes to the Implied Volatility of the Options
What Time Period this will happen
Justify why these things will happen. Be clear and concise.

10. Example
“On April 19th Google will have its Earnings announcement. As that announcement approaches the IV on GOOG will significantly increase due to the approaching risk of a large gap in its trading price. GOOG also has a history of strong directional price movements as it approaches its earnings announcement.”

11. Commit Criteria - Why
To make sure we are clear about why we are taking a trade.
During the trade we need to be able to make sure that the reason for the trade has not changed. If the reason to be in the trade has gone away why would we keep the trade?
To evaluate our decision process at the end of the trade.

12. Strategic Mindset
Our strategic mindset is the big picture at the time of the trade. Are we bullish, bearish or neutral? Is volatility increasing, decreasing or flat. What are the high level threats or supporting factors in this trade. Take a large to small incremental approach. Analyze news sources and all the information you can, but form your own opinion. Just because Cramer says it doesn’t make it real.

13. Large to Small Strategic Analysis
What is going on the World that can Affect this Trade?
What is going on in the Markets that can Affect this Trade?
What is going on in this Industry that can Affect this Trade?
Finally, what is going on with this company that can Affect this trade?

14. Some Advanced Hints
Focus on developing your strategic analysis skills, they can help you identify places to look for good trades as well as avoiding risks.
Important – you are analyzing what the MARKET will do, not what YOU think it should do. The market is filled with people who disagree with you and likely have a wide variety of opinions. The sum of all those opinions determines what the market actually does.
If you personally have a very strong opinion about what will happen to a stock or in the market it is a good time to just step back. Objectivity is critical to making decisions about our trades. When we lose objectivity we make bad decisions. I don’t care how strongly you feel that AAPL is going to come crashing down in the next few weeks, it is a BAD idea to bet half your portfolio on it.

15. Engineer the Tactic
Once you have a clear idea of what you are trading, how you trade it becomes the next most important decision. Every opportunity has both good and bad ways of trading it. Either could be successful, but a well engineered trade give you the greatest profit vs. the risk you take on. *Note – we have a whole class focused specifically on this topic.

16. Goals for Trade Engineering
Control how much Risk you take on
Align the trade based on the relationship between IV and Forecast Volatility
Use Time Erosion (Theta) to your advantage
Effectively use margin (cash = flexibility)
Offset other risks in your portfolio

17. Engineer for a Graceful Failure
You will be wrong often. It is part of trading you need to accept and specifically prepare for. Creating trades that fail in a controllable way is critical to having a sustainable trading business. An advanced trader knows that trades will fail and designs the trades to handle these failures in a controlled and manageable way.
*This will also be talked about in the trade engineering class.

18. Tactical Employment
The Tactical Employment describes the technical details of the trade. As the trade changes over time it is important to know the details of the trade when we started.

19. Tactical Employment Details
Leg Construction with Contract Details
Debit or Credit Amount
Max Profit/Max Loss
Break Even Points
Expectancy or Probability of Success
Greeks

20. Mid-Course Guidance
A trade never survives first contact with the markets. We want a clear idea of what we should do when the trade changes.

21. Basic Mid-Course Guidance
Define Stop Losses
Asset Price, Historical Volatility or Position Value are good tools for defining stop losses.
Set Stop Losses at a point BEFORE your max loss you are willing to take, slippage will happen.
Evaluation points are good alternatives – like Stop Losses but you evaluate and decide what happens
Eject Criteria
These limits, when hit mean you IMEDIATELY get out, no questions asked.
Adjust points
A plan for making trade adjustments at specific levels

22. Advanced Mid-Course Guidance
Use Expectancy to Determine Points to take Action
Expectancy changes as the underlying price or Implied Volatility changes
Stop Losses, Adjustments even Profits can be triggered by current Expectancy Analysis
When Expectancy gets below a certain point (or negative) the trade no longer makes sense – time to exit or adjust

23. Advanced Mid-Course Guidance 2
Waypoints
any long trade needs points in time where it is reevaluated – plan for these
is the Commit Criteria still valid?
are there any new risks?
does the trade still make sense?
Can the trade be adjusted for an improvement?

24. Exit Plan Plan for the Exit What is our Profit Target?
How will this trade be closed?
Leg out or just close down
Let expire? Cover assignable positions?
If we get a large profit early what do we do?
Is there a time limit on this trade?

25. Advanced Exit Plan Plan for Early Exits
Incremental Profit Targets for the life of the Trade
Focus on Maximizing the Time Value of the Trade
A small Quick Profit can be better than a Slow Larger Profit
Free the Margin up for other Trades

26. Trade Plan Review Trade Plans make us Better Traders
More consistent
Better analysis
Disciplined
Trade Plans allows us to evaluate our own performance
In hindsight was the plan good or bad?
Where our assumptions realistic?
How did it succeed or fail?
What can I do better next time?

27. Easy and Valuable
With practice the trade plan should only take about 5-10 minutes to create
It simplifies your trading
Just fill in the sections and you should have the information you need for the trade
With use your trading should become quicker and more confident because you know you did a full analysis of the trade
Better Management of Failed Trades
When a trade is failing you will have a plan ready, saving valuable time and money
Reduces the effect of emotions on your trading
The process helps to regulate bad impulse trades and poor judgment calls in times of stress

28. Tips and Tricks
Make a schedule for your trading day and make sure to include the following;
Market & Economic Review
Take time to see what's going on in the world that could affect your portfolio
Focus on getting a good handle on the big picture problems in the world
Explore and research new trades
Find interesting things in the market that could be traded
Keep a list of possible trades even if you don’t have much margin left
Review your current trades
Look at every trade you currently have
Is the Commit Criteria still valid?
Could I take an early Profit?
Take breaks away from the market
A fresh mind is a powerful tool