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My Trading Guidelines

  1. The PRIMARY objective when competing in the financial market is to protect your capital.
  2. Remember, one of the most important lessons any investor can learn is when to stay out of the market altogether.
  3. QQQQ security must not exceed 2X max % margin; sell short term at a strike at least $4 lower than current price or leaps at 2 year support price.
  4. Do not trade DIA, they are too volatile at present
  5. VIX and NDX can be used as market volatility index and NDX or SPY to buy market
  6. Keep PUTS sold on each underlying securities to a max of 5% as you approach 50K, and then to 3% beyond 50K
  7. Only trade up to 90% of available margin. Keep 10% or ½ the cash needed to settle 1 assignment, the largest possible open position.
  8. Target return is minimum 40.0%, but…DO NOT GET GREEDY!
  9. Stagger expiration months for each short-term PUT sold i.e. ½margin % Apr exp and ½margin % May exp. review
  10. Only sell LEAPS where the strike price is below the major resistance level – the profit margin should be a little higher, 40-50%. This lower limit will have to be revised as the market rises.
  11. Do not close out profitable LEAPS when the market rises if there are no other profitable PUTS to sell.
  12. Where possible, sell at a strike price below the company’s book value
  13. Conservative positions should have a strike price a minimum of 5% below the current stock price. Long term Conservative should be at least 13% below strike. Conservative positions should make up the bulk, 60% of your portfolio.
  14. Moderate positions should have a strike price a minimum of 5% below the current stock price. Long term Moderate positions should be at least 13% below strike. Moderate positions should make up approximately 30% of your portfolio.
  15. Aggressive positions should not be taken up short term, it’s a speculation position, keep total aggressive allocation to approximately 10% of portfolio. Only open positions on these volatile stocks when the strike price is at least 30% below STO price.
  16. If experimenting with a new theory that contradicts a previous rule, only do so with one 3% position max, and then monitor it for at least two months, then refine the rule to suit.
  17. With Options sold on more volatile stock, i.e. non blue chip, try to only sell within these guidelines.
    • Options 1mth to expiration, sell a strike price of a min of 13% below market
    • 2mth to exp 16%; 3mth to exp 19%; 4mth to exp 22%; 5mth to exp 25% below market. (Unless strike is close to book value)
    • Options 6mts - 1yr to exp. sell a strike price of a min of 30% below market
    • LEAPS >1yr to exp. sell a strike price of a min of 33% below market
  18. Be cautious with short term options <2 weeks, the risk of assignment is great.
  19. Back to paper trading after 3 wrong trades within a 12 month period.
  20. If you suspect you are going to be assigned, on a slightly in-the-money option, on exp Fri. buy back the put and sell one at the same strike price further out in the future to offset the loss. (Roll out). If the stock is falling roll down or just close out the position at a loss if it is too risky. (i.e. bad company news)
  21. Select Options that have LEAPS available in preference to ones that do not have LEAPS, it gives more options for rolling out if need be.
  22. Never sell a PUT unless you would be willing to own the stock at the strike price. This does not mean that you want to own it; just that you think that it represents a fair value for the stock. Fair value is defined as the price that the stock becomes attractive to other investors.
  23. The plan is to never get assigned unless that is the specific objective.
  24. Try to stagger expiration months for options in the same industry i.e. May (SLB), July (NE). (Can tend to be hard as similar companies report earnings around the same time)
  25. If you have many Leaps of the same expiration date open, from six months out start to buy back the cheaper ones when the ROR drops to below 20% and sell the next year out.
  26. Max of 20% of margin worth of options expiring in the current month. If more, start closing out the most appropriate options ASAP.
  27. Remember the ultimate goal is to increase your capital or to conserve it, do not hesitate to take a small loss and close out a position rather than risk losing everything.
  28. Trade to trade well, not just for the sake of trading, stick to the rules.
  29. Aim to consistently take small profits out of the markets, slow and easy wins the game. (Keep the PFE loss in mind)
  30. Keep focused on your big picture goal.
  31. Do not compromise profit by chasing prices, wait for the price to increase to your minimum.
  32. If strike price & assignment are approaching, investigate company fundamentals and determine if to buy back, roll out or roll down. (If its really bad news, buy back, if just cycle investigate roll out)
  33. Leave hope, faith and optimism out of your trading; deal only in facts and analysis.
  34. Stay detached from the outcome of each trade; develop “Isn’t that interesting attitude”. Learn ‘what went wrong’ from each trade that went against you and note the reasons on the spreadsheet.
  35. Limit the time placing the trade don’t let the daily news and hourly price movement affect your planned trade. Do however check for recent bad news before placing the trade. Analyze, plan, and place Day or GTC order.
  36. Don’t stray from core business of selling PUTS, unless the new theory is thoroughly understood and tested by paper trades for 2 months.
  37. Set alerts according to options worksheet. If alerted, evaluate and decide what to do, roll, buy back, set lower alert, etc.
  38. Do not average down when you roll out, stick to the max percentage guideline or you may just increase your loss.
  39. Remember you can always stay out of the market altogether if the Vibe is not right.
  40. If a stock does not act right, DON’T TOUCH IT!
  41. Trade only on stocks that exhibit orderly personalities.
  42. As stock price gets further above the support level that you would like to sell at, reduce the time of the option that you sell. That is, sell month-to-month options only, no leaps.
  43. Don’t let all your options get close to assignment at the same time (during a correction) close or roll out the ones most likely to be assigned first, then evaluate each position in turn. ?
  44. Having to buy back 1 out of every ten 1, 2 & 3 month positions at double the price they were sold at plus insurance every 1-2 months is factored into the sell price of 55% don’t be afraid to buy back a short term position to close if it does not act right.
  45. Every three months take 10% of the profits of closed positions and put into safe investments. Or lower the amt deposited per month. Keep proper asset allocation.
  46. When planning a trade make sure the option symbol, strike price, exp date, stock name, number of contracts and if day or GTC order is correct on the order confirmation page before pressing the place trade button.
  47. Think about each opening trade at least a complete day before placing, if the price is fleeting the issue is volatile and should not be traded. Don’t rush into any trade that you did not research thoroughly. Plan your trade and Trade your plan. Plan the trade and sleep on it if it’s the first time opening a position on that particular company, review before placing.
  48. Don’t chase high returns or wait for option prices to increase if there is a option that you want to trade that is currently giving you your desired rate of return that is selling at a strike price below the support level…DON’T be GREEDY.
  49. Don’t rush to jump on a falling stock, wait… let it stabilize, research with Valueline and trade based on its merit.
  50. When researching new companies on which to sell options, check Valueline and Navellier reports and stick to B+ rated companies unless you really have an understanding of the underlying company and industry.
  51. Buy back options when the current ROR is less than 20%, if you need the money for another trade or are over the max % for that industry. Otherwise let it expire if the expiry date is close.
  52. Buy back PUTS that are profitable before expiration if better opportunities present themselves, then sell a PUT further out on the same stock if the fundamentals are still good.
  53. Remember when selling an option… their will always be another opportunity. Do not rush into a poorly researched trade.
  54. When open Put position gets below 5% investigate selling another put to up the %age for that industry.
  55. If you are leaving the country for an extended time close out all positions that you do not want assigned.
  56. Part of researching the appropriate option to sell is by completing the Options Analyzer excel sheet for each stock.
  57. If the margin page indicates a “ROI/y as of now” < 20% and over 0.70 of the premium is already earned, close the position if the “ROR if closed today” is greater than the “Original annual ROR” when opened
  58. If you suspect a correction in the near future start closing out the “ROI/y as of now” < 25%, positions as they become available, don’t worry about leaving a large cash balance, the equivalent ROR will still be high.
  59. Use MSFT (57.6% return) position as an experiment as to the ultimate return when a low yield STO~32% is closed early. The stock price has to cooperate. APCC price did not cooperate but overall return was still 31.5% with a STO~29%
  60. Don’t rush into diversifying so much that you STO on a stock that is not impeccable; stick to the great companies. (Navellier and Valueline model portfolios)
  61. Set alerts on the OptionsXpress page of the stocks that you trade on a regular basis at a price where puts will be at a profitable level…i.e. ~$5 above support level.
  62. Keep $10,000 in cash in case of exercise, so each position exercise cost must not exceed $20,000 (using 50% margin)
  63. Carefully evaluate a position whenever the stock price gets to the strike price; never allow the price to go below the strike without thoroughly investigating.
  64. Investigate all companies that you are considering on bulechipgrowth and Valueline website before placing trade.
  65. Look for STO company ideas in Louis Navellier buy list.
  66. DO NOT sell shares short trying to make up for a put that is going to be assigned, buy a protective put if you must do something. Ideally you should be covered by a protective put at all times anyway.
  67. If a short covered call is in the money (far enough to be assigned) on expiration Fri buy it back and sell the next month out if you want to keep the stock.
  68. Don’t buy back a covered call to chase profits of a climbing stock. Only buy it back if you really want to keep the stock.
  69. You are not an analyst, if Valueline or Louis says stay away…. LISTEN!
  70. Sell 3-4 month options after recent positive earnings report but buy back prior to next Quarterly earnings report. Keep a list of quarterly earnings dates. You may sacrifice some profit by waiting for earnings reports to come out but you will also pick up big bargains from time to time if earnings are missed and the share price gaps down.
  71. When the market gaps up on good news it’s the time to look for positions to close out, not open new ones. Conversely, when the market is falling it is the time to look for positions to open not close in a panic.
  72. Stick with options that go into the money unless the company is really in peril. Keep rolling forward if necessary. STO initially at the correct support level determines if this will remain profitable during a roll forward.
  73. Keep with the strategy of only selling so many contracts that at max margin (stock at strike price and max put value) you are still within the $2500 or 1/X maximum margin limit per position. Where X equals number of open positions.
  74. Calculate max margin using options express pricer webpage at the strike price to find the max value of the put option. This will represent the max margin I am willing to accept on any position. If this figure is breached investigate closing at a loss.
  75. Get ideas for follow up every evening by reading lots of news on the related companies in my yahoo watch list.
  76. The market always rebounds, but a particular stock may not.
  77. I have been historically bad at judging when to buy beaten down stocks. Stay away from them and their options. Only touch again if they return to regular quarterly earnings growth.
  78. Stay away from one product companies, any bad news plummets the stock e.g. ELN
  79. Company must be around for at least 7 years with stable earnings/stock price for at least 3. i.e company must have some substance to indicate that it will be around for the next few years.
  80. As interest rates rise financial stocks go down and vice versa
  81. Stay away / get out at the first sign of accounting irregularities.
  82. Don’t enter speculation plays with your options; you are in this business to make consistent returns.
  83. Do not trade direct commodity related stock, i.e. oil co., coal, metals, corn, etc. Their value is derived directly from demand for the commodity so they are already a derivative prior to trading the option.
  84. The shares that I have purchased are long term growth prospects, do NOT sell them unless trouble in core business or they go up so much as to constitute more than 5% of my total portfolio.
  85. Don’t trade options on recent IPO’s (<2 yr old co.) If you must speculate in the company buy a few shares.
  86. When a good company is in bad times and gets down to its book value sell at the money LEAPS
  87. Close any position that is in the money with <1 month left or your chances of assignment increase as the time value approaches zero.
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