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Option Trading Tip - Follow A Consistent 'Routine'

Aug 17, 2007
Just as elite athletes go through a specific warm-up routine for their body and their mind before competing at a meet, we too as option traders need to follow a specific routine/process before we enter a trade and compete in the markets.

Here is the step-by-step routine that I follow each market day when looking for new short-term option buying opportunities.

1) I wake up at 5am Australian time (3pm New York time - 1 hour before the close) and go to the computer.

2) I then pull up the 'real-time' charts in my watchlist and check the DOW, S&P 500 and Nasdaq Comp to see if the day's sentiment is bullish, bearish or neutral. I then check each individual stock chart for my core Call or Put buying 'trigger' which is either a higher trough or a lower peak.

3) As I go I make a list of those stock codes that fit this criteria so I can analyze their charts further.



4) I then focus on each of these charts and analyze the underlying long and short-term trend, long and short-term moving averages, RSI, bollinger bands, potential breakout patterns or candlestick reversals and last but not least, volume.
- I'm looking for 'evidence' of an imminent upside or downside move.

5) I then try to cull this list so that only the highest probability trades remain.

6) I then run the remaining stocks through my Volatility Cone to establish whether implied volatility is low, high or fair.

7) I then take another run through my remaining stock charts and choose the single best opportunity, taking all factors into consideration including my GFI ('Gut Feel Indicator').

8) I then login to my trading account and check out strike prices, expiry months and delta.

- If the options on the stock I have chosen have high implied volatility, I will be looking to buy the current month deep ITM options, with a delta as close as possible to 1.

- If the options on the stock I have chosen have low implied volatility and the stock has formed a reliable break-out pattern, I will be looking to buy the next month out, ATM options with a delta close to 50.

- If the options on the stock I have chosen have relatively 'normal' implied volatility, I will be looking to buy the next month out, ITM the money options with a delta of 75-80.

9) Once I have found the strike price and expiry month I want, I then work out roughly how many contracts I can buy considering per my capital allocation for the trade (usually 10-15% of my short-term trading bank).

10) I then pull up the order form I need and fill everything out except for the limit price.

11) I then wait until 3.45pm and as long as the stock is trading within the top 1 third of the day's range for calls OR the bottom 1 third of the day's range for puts, I enter in my limit price (usually the 'ask' price for tight spreads or 'in between' the bid and ask for wider spreads) and pull the trigger.

12) Once the order is filled, I then place a 20% trailing stop on the option, which will close out the trade 'at market' if hit.

13) I then fill out my trading diary, which includes the details of the transaction and exactly 'why' I got into the trade and what my exit scenarios will be, and attach a copy of the stock chart.


NOTE: If I am currently in a trade/trades this process will also include analyzing that/those particular stock charts and making my decision to either stay in or exit the postion(s).

Now the reason I just shared my daily routine with you was to illustrate the importance of 'consistency'.

When you follow a trading system and analysis sequence consistently, you get to a point where you know EXACTLY what you need to do and EXACTLY what you are looking for.

This keeps you objective, focused (i.e. not jumping around all over the place looking for trades) and also supports you making the best possible use of your time.

Afterall, who wants to be staring at a computer screen all day? I have found success in letting my trades come to me on my terms and that fit in with my 'routine'.
About the Author
James Thomas is a successful private option trader and trading mentor. Get your free course, "What The Wall Street Hot Shots Won't Tell You!" for a limited time at: http://www.option-trading-tips.com
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