Index Options: Options on the NDX, RUT and SPX indexes
OTM - Out of the money
Vertical Spreads: Selling an option and limiting its risk (and limiting the possible return) by buying the same class (PUT, CALL) one or more strikes away in the same series (expiration date)
Credit Spread: Selling the option nearest the underlying price and buying the option farther away for a net credit.
Philosophy:
A trading system consists of two primary components; the trading strategy and the trader. A good strategy will still lose money if the trader fails.
Use tools to monitor trader performance separate from strategy performance.
Manage trades by taking advantage of opportunities and dealing promptly with jeopardies.
Use a Trading Dashboard (Instrument Panel) to reduce the workload of handling emergencies.
Vertical Credit Spread Ground Rules:
Trade options on these indexes: NDX, RUT and SPX.
Trade spreads as a unit; use limit orders.
Whenever feasible, add the Iron Condor companion spread
Iron Condor credit target: 10% of the difference in strike prices (capital at risk).
Credit Spread Entry Rules:
Enter new weekly as soon as quarantined funds are released
Enter new monthly (around 60 days to expiration) as soon as quarantined funds are released.
Maximum Short strike PoT (Probability of Touching): 20%.
Minimum spread credit: 2.5%
Credit Spread Management Rules:
Opportunity - If spread reaches 80% of its capped yield, place a limit order to close. After close, enter a new spread in the same series to replace it using the entry rules.
Jeopardy - If spread has lost more than 25% of capital at risk, exit ATM (at the market). Enter a new spread to replace it using the entry rules.
Credit Spread Exit Rules:
If spread is still open in last hour of last day of trading, then exit if PoT > 20%. Otherwise, let it expire.
Trading routine:
Before the market opens.
Review trading dashboard before the market opens.
List opportunities to watch. Place limit orders if overnight futures do not show a likely large opening gap.
List jeopardies to watch. Place contingency orders as necessary.
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