Option Trading Rules

General Rules
1) Price is truth. Price trumps all other indicators. Only use MACD, STOCH in non-trending stocks.
2) Place no new trades until after 2pm.
3) Trade only defensively before 2pm.
4) Trade with the major market trends.
5) If 80% of max profit prior to expiration get out.
6) If the major markets are having a big up day, look for bearish stocks that haven’t broken trends to put on BRCS. This is effectively buying them on sale.
7) Be careful to not overexpose yourself in any one industry or sector. Limit your portfolio risk to no more than 10% for one sector.
8) Trades moving in your direction should only be exited via a trailing stop.
9) Stop all trading once your entire portfolio is down 20%.
10) Only use GTC order to exit trades not for entry unless its for WOTM iron condors.
11) Once you’ve entered a trade don’t change your plan. If you want to change, close down that trade and put on a new trade.
12) No single trade at max loss should have more than a 2% loss to your entire portfolio.
13) Don’t trade the first week of the January. Very volatile.

Iron Condors
1) Make sure your short position is at .10 delta (maybe .15 on the converse of trend).
2) Close your IC once either short position reaches .30. Sell a new position and maybe advance a month forward. Look at adjusting once your short side reaches .20, adjust at .25 per Michael Drew.
3) Check that your VIX and RVX are reasonable high to give you good distance.
4) Make sure your ICs on are indexes or high volume stocks. Indexes are better.
5) Make sure your credit is at least a 7% return for the front month.
6) Always have at least 4 weeks prior to expiration when placing the trade.
7) Look to close out the trades early for .20 per side.
8) Sell 4 to 10 weeks out during moments of high volatility.

Vertical Spreads
1) Make sure your positions are counter trend and OTM.
2) Exit at least short position on a buy back of twice original credit. Hold long position if reversal is confirmed by large volume or major shift in overall market.
3) Look at exiting if the trend becomes broken such as setting a lower low in a BLPS or a higher high in a BRCS.
4) Make sure short position is no more than a .20 delta. If you have to close and you have more than 4 weeks to expiration consider holding your long position for reversal.

Diagonal Spreads
1) Always have a stop loss on your long position no greater that 20% of the underlying cost basis. 10% per Jesse Livermore.
2) Look for trades that are in between strike prices .
3) Make sure the delta on your long strike is at least .80.
4) Look for a 5% return in the front month or better.
5) Make sure you have a good bullish trend.
6) Buy long call 2 to 3 months out and 3 to 4 strikes ITM.
7) Sell the call to cover that has the most time value in the front month and will still be profitable. This will give the best downside protection.
8) If you want to hold a long call DITM for some straight line appreciation then put a 10% stop loss on it.
9) Make sure that you don’t make up more than 5% of the total open interest on a option. Especially the long, DITM option.
10) Buy back your short option once 70% of its time premium has decayed. Look to roll out to a new month if its time decay vs. underlying movement of the stock. If it is stock price (like a sudden decline) buy back the call and place a stop loss on your long position.
11) Buy back your short option once the delta of the short reaches .25 or less. At that point your short option is only covering 25% of your potential loss to the downside. Sell another ATM short option for protection.
12) If all other things are the same and you can’t decide which strike to sell, sell the OTM strike for the most profit and the ITM strike for the most adverse protection.
13) Be careful of delta inversion if the price moves too much in your direction. Be prepared to roll to another short strike or move the entire trade further down (so that you aren’t increasing your risk).

Calendars
1) Look for stocks that aren’t strongly trending (neutral bullish and neutral bearish are fine).
2) Buy a put one or two strike out of the money at least 3 months out.
3) Sell a put at the same strike in the front month.
4) When selling your first front month look to take out 35% or more of the cost basis of the long put.
5) In the final month of the long position look to exit the position by selling to close the trade and not waiting through the time decay on the long asset.
6) Set a stop loss of 50% of the initial debit.
7) Be sure to adjust early to avoid Gamma risk (8 to 10 days prior to expiry, earlier the deeper in the money).
8) Be sure to adjust early if the delta of the short increases by more than +.20 or the short delta become greater than the long delta (ie. the deltas invert).
9) Watch for delta inversion. Be prepared to roll, close, or replace if the price moves too strongly in your direction.
10) Use GTC orders to roll when the price is right at the strike and within 15 days of expiry.
11) Make sure you have at least 2 rolls for a calendar.

Potential Rules
1) When Rolling - Make sure the new position you take while rolling is something you would take anyway. If not, don’t roll, just close.
2) Maybe set a limit to how many times you will roll a diagonal in a month? Like limit it to 2 rolls or X% of the underlying or X times the ATR?

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