HOTLINE HELP: Option Trading Checklist for New Traders
February 7, 2007
So you’re ready to trade some options, but there remains a lingering fear for you that you will forget something. Welcome to the club—it’s to be expected. Those butterflies—not the strategy sort—are nature’s way of reminding you that there’s some risk involved and to slow things down a bit.
When you’re first starting you may want to develop a physical checklist for strategy review and order entry purposes. This will help keep you focused on the main task at hand: establishing a trade that takes into consideration managing your risk. While not exhaustive, these two checklists may help make the process smoother for you.
Strategy Checklist
- Review Strategy
- View/Create Risk Profiles
- Identify Risk, Reward & Breakeven
- Identify Optimal Market Conditions for Strategy (Bullish, Bearish, or Neutral)
- Identify Current Market Conditions
- Identify Optimal Volatility Conditions for Strategy (Low Volatility or High Volatility)
- Identify Current Volatility Conditions
- ID Entry & Exit Parameters
- Calculate Margin Requirements
- Calculate Cash Required in Account
- Paper Trade the Strategy
Pre-Order Entry Checklist
- Test & Understand Strategy (See All Items Above)
- Identify Risk, Reward & Breakeven
- Identify Entry & Exit Parameters
- Identify Your Stop Loss Value & Approach (What is the max loss you are willing to accept and what order exit will you place to manage it?)
- Calculate Margin Requirements
- Calculate Cash Required in Account
- Check the Trade is Being Entered in Proper Account
- Identify the Option Symbol
- Identify the Number of Contracts
- Identify Position Type 1: Long or Short (Buy or Sell)
- Identify Position Type 2: New Position or Offset Existing Position (Opening or Closing Transaction)
- Identify the Order Type: Market, Limit, Stop Order or Stop Limit
- Identify the Order Duration: Day or Good Until Cancelled
- Identify Conditions (All or None, Fill or Kill or None*)
- Most new traders will leave this field “None.”
- Preview Order!
You can either create a new option position or off-set an existing one, so there are 4 order actions:
- Buy to Open—New Long Position (i.e. long call)
- Sell to Open—New Short Position (i.e. covered call)
- Sell to Close—Offset Existing Long Position (i.e. exit long call)
- Buy to Close—Offset Existing Short Position (i.e. exit covered call)
By completing all of this information prior to encountering the order entry screen, you are less likely to make mistakes during the entry process. Again, these are not exhaustive lists—you need to always acknowledge the fact that you are responsible for your own trading. Doing this early in the game helps you to assert much more control over your learning curve and accelerates successful trading.
To see the previous articles in this series, please click here.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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