My Options Trading Plan Template & Pre-Trade Workflow

Introduction

Nearly every trader makes the same beginner mistake when they first begin trading: they neglect to establish the habit of creating a clear trade management and exit plan right at the start of every new trade.

You might’ve heard this over and over, but trust me, experience and research show it’s really important for a higher long term profitability. I am dead honest with you when talking about this trading mistake. I’ve made it too, believe me. Just like many of you, after learning the basics about options, I’ve dived head-first into option trading, and all I did was thinking about opening good new option positions. It took me some time, and some decent losers, to realise that there are other important steps of the trade to prepare as well.

The lack of a trading plan among traders often stems from a mix of several factors: lack of time, lack of experience, but sometimes plain laziness or procrastination.

• Many overconfident traders think they can rely on intuition or gut feeling, underestimating the value of a well-structured trading plan. They believe their market sense is good enough to navigate trades, which can and does often backfire.
• Crafting a detailed trading plan requires time and focus. Some traders might find it too complex or intimidating, too much of a hassle, and thus opt for impulsive decisions instead.
• Beginner option traders may not understand the real benefits of a sound trading plan. Many think it’s as simple as selling options high and buying low (or vice versa), without considering factors like decent risk management and proper market analysis.
• Traders often intend to create a trading plan but keep putting it off. When an enticing trade opportunity arises, they jump in without a thoroughly considered plan, convinced that they’ll ‘figure it out along the way‘ or ‘they have the trading plan figured out in their head’.
• This is all fine and ok when things go their way. But during volatile market conditions, traders usually abandon their initial “figured out” plans, due to panic, or even worse, they never had a plan to begin with. Fear and greed often interfere with rational decision-making which can result in big losses or at best in a lower profitability.

So do I need to repeat that I believe every new position needs a trading plan ?

By sticking to a well-defined set of rules in my options trading strategy, I can effectively eliminate basic trading errors, it improves my profitability and it does avoid emotional decision-making from my trading process. 

The aim of this article is to inspire you and to help you create your own trading management plan and system for trading short put options. My primary reason for sharing this is to help and assist other option traders in navigating away from this basic mistake of not having a plan. Mistakes are great learning opportunities, but if my insights can prevent you from making even a few big losses, it’s valuable for you (and to me too).

So, if this article assists you in establishing clear trading criteria and swiftly eliminates options that don’t match your standards, and if it conserves the time and effort you’d otherwise waste on unproductive analysis, then its purpose has been achieved.

The 7 step system I will explain below isn’t a hasty rundown. Rather, it’s a methodical guide designed to inspire you to draft your own system for making better trading choices. I’ve crafted this step checklist, arranging each action and contemplation step in a logical order, ensuring you can seamlessly apply it to your new potential short put option trades too.

Managing your emotions while trading options isn’t about becoming some cold, emotionless robot or a fearless superhero. It’s actually super straightforward: always have a plan ready before you make any moves, and then follow that plan to the letter. Even when your emotions are yelling at you to do something different, stick with your original plan. It will show to be a profitable help in your trading.

Note : This article primarily focusses on selling put options. However, the principles of devising a trading strategy are relevant for other option strategies too. While the specific management and criteria will vary based on the strategy, the importance of having a well-crafted trading plan remains consistent across all strategies.

My 7 Step Options Trading Template – Naked Short Put Options

Here’s my detailed, step-by-step trading plan I’ve developed for opening a short put option position, along with the reasoning behind every step of the plan:

• Step 1 – Market Awareness & personal watchlists
• Step 2 – Selection of the Underlying Asset
• Step 3 – Determining the Strike Price & the Expiration Date
• Step 4 – Position Sizing
• Step 5 – Opening the position – Selling the short put
• Step 6 – Monitoring and managing the option position
• Step 7 – Record Keeping

1. Market Awareness & personal watchlist

As an option trader, I want to make sure I have a minimum level of market awareness by staying up to date with recent market news. I focus on having a good idea of : 

• the market situation and its recent trends (SPY/QQQ/IWM)
• the actual market volatility and its trend (VIX)
• specific economic indicators or news impacting the stock market (FED, CPI, Job reports, …)

Besides global market news, it is obvious I want to keep track of the news and the trends related to the stocks that are on my “options watchlist”. 

I think every trader should create a watchlist. We can’t follow every stock ticker out there, and to have a good idea of how stocks are currently valued on the market, it is wise to focus your trading to a relatively limited watchlist of known underlyings.

My options watchlist is simply a list of underlyings that I keep track of in the trading platform or applications I use. Creating, updating and maintaining my watchlist has become a part of my daily trading routine. By screening or specifically ordering the tickers on my watchlist, I can quickly pick up stock moves, see trends, spot price extremes, and get a general scope of the market conditions.

On top of my watchlist I have the market and volatility indexes (/ES and /VX), allowing me to know where the market is at any point in time throughout the day. And then directly below, I have the tickers I have positions in, and further down the list I keep the other tickers, all part of a core list of favourite stocks that I am most interested in. I update this list frequently to my changing interest in the market and stocks. 

All stocks and options must have a high degree of liquidity to be part of my watchlist and they must be tradeable for my account size (with the current size of my account, I will limit my watchlist to stocks with a nominal value per share lower than $400).

It goes without saying that I will avoid very risky stocks with spicy option prices. I will only trade stocks from companies I am familiar with and for which I am confident they will stay in business without any risk of bankruptcy (remember the risks involved of trading AMC, BBBY and a few others).

I want to keep the list relatively short and my current options watchlist is about 50 underlyings now, and this gives several advantages:

• I am familiar with specific underlyings, which allows me to have a better understanding of their business, of their market situation and share price behavior, it enhances my market prediction and helps me to make informed trading decisions.
• dealing with known underlyings simply enables better risk assessment and management. 
• focusing on a few underlyings lets traders “specialize” and become experts in specific markets and underlyings. This in-depth knowledge can lead to a more effective execution of strategies resulting in an increased profitability.

For newer or beginner traders, my advice is to let your watchlist expand organically over time depending on your interest, research, portfolio possibilities, while you are trading or looking for opportunities to open new trades.

2. Selection of the Underlying Asset

When I want to make a new trade, open a new option position, I will automatically screen my watchlist for possible candidates for opening new short put positions. When looking for possible candidates, I apply a couple of principles and criteria to make a selection.

Typically, when opening a new short put option, the basic premise is that I want to make a profit without being assigned the stock. I want to capitalize on holding options positions without acquiring shares. With this being said, it is however important to note that the possibility of being assigned stock doesn’t deter me from opening short put positions.

When engaging in short put options trading, it is prudent and wise to select stocks that I would not mind holding for a longer period. Because occasionally, trades may and will not unfold as initially planned. So basically, with the profit/loss graph of a short put option in mind, I want to select an underlying stock that has the potential to go up, remain stable or at least stay above the strike price. This approach involves having a neutral to bullish perspective on the selected stock.

Example below : P/L graph for a put option with strike $90 with premium of $1,40. Break-even at $88.60; exp date 17 Nov 23

Here are the most important criteria that I take into account or what I am looking for: 

• descent to high level of implied volatility (IVR) preferably > 30, preferably stocks who have had a recent rise in implied volatility 
• stocks with a share price near its lows or having had a strong recent drop, maybe due to an overreaction of the market
• no earnings call before expiration date or at least I usually don’t want to hold the position through earnings (earnings can be have unpredictable reactions on the stock market)
• do I need to consider any dividend risk?

The idea is to seek out stocks with a share price that have experienced a downward movement in share price and have now stabilised or even potentially indicate an upcoming increase. Preferably, we target stocks with elevated option prices attributed to significant volatility, often resulting from a broader surge in market volatility.

I use the stock screening possibilities of the two trading platforms that I am using, but there are certainly online possibilities too (such as Tradeview) to filter for candidates based on your criteria. I will make a demo video about this and have it available on my Youtube channel.

Ok, after this step I have selected the best candidate for opening a short put and I have to take the next step: selecting the best option matching my trade criteria.

3. Determining the expiration date & strike price

After selecting the underlying, I will decide on an expiration date that aligns with my market analysis and my trading strategy.

Every trader gets to choose the number of days to expiration he or she prefers, taking into account the associated risks, which I will not explain in this article here.

But basically I will follow the tastytrade research recommendations for choosing the DTE (Days till Expiration) for opening naked put positions : I prefer to choose the monthly (for higher liquidity) expiration dates between 45-60 days.

With the underlying and the expiration date decided, I can open the option chain and the next thing to decide is the strike price for the short put.

Example option chain AMD – selling a put option at strike price $90, delta 0.13, PoP 88%

Obviously for opening a new short put position, I will look to the put side of the option chain and I will select a strike price below the current market price, with a relatively high probability for the option to expire out of the money (Probability of Profit- POP), or with a strike price where I am comfortable buying the stock.

While selecting my strike price on the option chain, I am looking for a strike price, having : 

• Probability of profit > 80 % of expiring out of the money : I usually choose a strike price with a POP in the 75% – 90% range (around the 1 SD – one standard deviation, and outside the expected move). The delta parameter on the options chain also gives a good indication of the expectancy of expiring out of the money, if your trading platform doesn’t specifically mention it somewhere on the screen.
• Enough credit received:  I prefer to get a minimum of a dollar in credit received, but depending on the stock, I sometimes accept lower with 50 cents being my “mental lower limit”.
• A decent return on capital. I will look at the profit (premium received) relative to the risk (Margin requirement/buying power requirement).

While I typically pay close attention to how a new position will impact the beta-weighted delta of my entire portfolio, especially when I’m implementing various trading strategies, my sole objective right now is to open a short put option, so I’m intentionally choosing not to discuss the implications for my portfolio’s overall delta right here in this article. 

4. Position Sizing

Next step, before I can actually put in the trade order, is to determine the size of the trade based on your risk tolerance and account size, in other words, the number of contracts that I am willing to open.

I want to stress that in my opinion, position sizing in options trading is crucial for managing risk and maximizing potential returns. 

In this case, it determines the number of short naked options contracts I want to sell based on my account size, my risk tolerance or my specific trader risk profile. 

Correctly sizing your positions aids in limiting your losses when they occur, safeguarding your initial investment, and maintaining a trading approach that’s built to last.

Since I am operating largely in line with Tastytrade’s philosophy, I try to employ a specific cap on the margin requirement (or buying power requirement) as a percentage of my account’s net liquidation value to regulate the size of each new position. Specifically, I aim to keep the margin requirement (or buying power requirement) less than 5% of my account’s Net Liquidation Value (for smaller accounts 7% is sometimes necessary to have sufficient possibilities)

Additionally, I use a % based mechanism for controlling the aggregate size of all my positions, which is contingent on the VIX level. However, I won’t delve into that here (details are available in the strategy document on my website). Good position sizing helps in controlling the impact on your overall portfolio value in case the trade goes against you, thus preserving capital and ensuring a sustainable trading strategy.

As a beginning option trader, I have been opening just ONE option contract each time. 

After a couple of years of building experience, I sometimes open more than one contract, depending on the situation. But still, basically under normal circumstances, I will still open just ONE contract.

5. Opening the position – Selling the short put

Ah! We are finally ready to put on the trade. Yes!

This step is quite easy : I just put in the order to sell a put option with the chosen strike price and expiration date.

When immediate execution of an order (which is usually the case for highly liquid options) isn’t a priority for me, I tend to set my order a bit above the mid-price. This approach is particularly useful when the bid-ask spread is on the wider side. I steer clear of aggressively chasing the option price or consistently trading at the ask price, as such a bad habit would not only reduce my short-term gains but could also negatively impact my long-term profitability.

6. Monitoring and managing the option position

After successfully selecting and opening the short put option trade, the focus shifts to the next critical phase: actively monitoring and managing the open position.

With the position open, I am going to monitor the position’s performance as it moves with the market and adjust the position if necessary. Before discussing my trading plan, I want to elaborate briefly on the importance of having a clear management strategy.

Once option positions are opened, emotions can run high, especially if the market begins to move against you. After all, we have real money on the line! Having a predetermined trading plan helps maintain emotional discipline, stay mentally calm and prevents impulsive decisions based on fear or greed. I have learned that this is crucial for avoiding unnecessary losses and sticking to a rational strategy.

Every trader will inevitably, sooner or later, learn this lesson the hard way. For instance, I’ve experienced the mistake of clinging onto a losing position after an outlier move for too long, hoping for a market reversal, which never happened of course. Not only did that reversal never happen, but the position also deteriorated further.

Hence the importance of a well-crafted trading plan, what this writing is all about. It sets and makes us reflect on the criteria for trade entry and exit, position sizing, and risk management and leaves the emotion out. A structured approach helps mitigate the temptation to overtrade or overreact. 

Trading more mechanically according to a plan minimises emotional responses and ensures that you’re reacting to actual data and predefined rules, rather than gut feelings. This systematic approach brings consistency and objectivity to your trading activities.

I manage my short option puts according to my predetermined trading plan, which consists of : 

• a predetermined profit target
• predetermined adjustment rules based on DTE and share price evolution
• a predetermined exit strategy

Let’s go through these 3 elements of our trading plan one by one.

A. Predetermined Profit Target:

We need to set the profit target or decide on a suitable level to exit the trade with a profit. It is completely up to you to set the profit target you aim for, it is usually expressed as a specific % of max profit.

For short naked puts, I mainly trade according to parameters based on the research of Tastytrade and my profit target is set at 50% of Max profit. 

This means that I aim to manage and close the position early and that I am not aiming to win the total credit received, which can only be the case if I keep the option until expiration and if it will expire worthless.

If I am low in positions I may consider not taking the profit immediately and keep it on longer. It is advised and very easy to put in a running order to close it automatically at that level. I need to add that we can always at any given moment close the position early – we do not need to keep the position until expiration. 

B. Predetermined Adjustment Rules 

(1) Based on DTE

It is up to you to decide if you want to keep the position until expiration but I follow the results of Tastytrade research and prefer to manage my naked short put positions at 21 days till expiration. Studies show that 21 DTE is a good threshold to manage and to avoid gamma risk (which I will not discuss here).

Basically I manage at 21 days DTE : 

• I will close the position when profitable
• If not profitable:
  • I will roll the position out in time to a later expiration and receive an extra credit. 
  • Depending on the situation, when the share prices is below my strike price, I will I try to roll out in time and at the same time roll down the strike, if I can do it for a credit or in worst case for a small debit (for as long as I don’t lock in a loss).

(2) Based on share price evolution

After setting targets at “closing at 50% max profit” and “managing at 21 DTE”, I need to decide when and under which conditions I will manage the open short put position before the position reaches one of these targets.

Managing the options position has all to do with managing the risk of a position going against us and to avoid a loss on the trade. We need to answer the following question: “When do I adjust the position to improve my profit probability or to limit the probability of a bigger loss?”

So, when the trade is on, I will let time, days and hopefully weeks, go by and I monitor the position by doing ‘nothing’ until  : 

• The profit target is reached : I will close the position and take the profit.
• The put strike is breached downwards : If the strike price is hit, I consider to roll out in time and at the same time roll down the strike, if I can do it for a credit or in the worst case for a small debit (for as long as I don’t lock in a loss).
• When the trade goes strongly against us, and for a short put this means the stock is dropping a lot below our strike price, the option price will rise and gain more and more in intrinsic value. We need to be ready to execute our exit strategy (see below).

C. Predetermined exit strategy

The notion “exit strategy” is usually linked to trades that go against us and linked to a possible loss on the trade. 

In the case of short put options, a possible loss happens when we need to buy back the option at a higher price than the price we bought the option for. 

The option price will go higher when the share price is dropping and even falling below the strike price, or when volatility of the underlying stock expands which will also inflate the option prices. If I haven’t planned to take on the assignment of the stock, then I need to decide on a maximum loss that I am willing to take on the trade. 

I need to determine “my exit strategy” if the trade is NOT going as planned, and this of course must be aligned with my own risk management rules. 

In other words, I can set a stop-loss level to limit potential losses in case the trade moves against me, despite the adjustment actions that I have taken to improve the position.

Stop-Loss level

Setting a stop-loss at a specific percentage is sometimes tricky because markets fluctuate and we don’t want to get whip-sawed out of a trade that goes against us for a moment and then returns. 

Tastytrade research indicates that setting a stop-loss at 2x or 3x the premium received is statistically a good number to limit the losses on average. In the example above of the AMD naked short put, the 2x stop loss would be a price of the option of $4.20 ($1.40 + 2x $1.40) and the 3x stop loss would be a price of the option of $5.60 ($1.40 + 3x $1.40).

This is also what I do. I either agree : 

• to take on assignment at the opening of the position
• I set a fixed stop-loss at 2x the premium received, taking into account that I will manage the position to stay profitable when I have the trade on.

In case I had the intention to take on assignment of the stock, I will let the short put option expire worthless and I will buy the stock at strike price, making my break-even on the trade equal to : strike price – credit received.

If the share price continues to go down, before getting assigned, and the option goes deeper and deeper in the money (DITM), the short put option will start to behave more and more as long stock.

I see following scenarios for a DITM short put situation, to eventually still make a profit or to limit the loss : 

• I get eventually assigned, I aim for the stock to recover which is not guaranteed but possible
• I get eventually assigned, I aim for the stock to recover and I am aiming to lower my cost basis by selling (covered) calls against the short put (behaving as stock), aiming to reduce my loss as much as possible by already lowering the cost basis before getting assigned the shares. 

In that case I have the choice to turn the position into a straddle or even into an inverted strangle.

This situation is the worst that can happen, and should be an exception if I did my homework in the first part of my plan. Nevertheless, I have experienced this DITM short put situation. For me it was key to understand what was going on, understand the consequences and to have an action plan ready without emotional panicking.

7. Record Keeping

Crucial in the whole experience is to keep detailed records of every adjustment of the trade, including entry, rolling and exit points, for future reference analysis.

I keep a good trading journal dedicated to my way of trading and creates clarity and insight into how I am doing on a daily basis.

Keeping an options trading journal for transaction record-keeping is crucial and it helps me with :

• Tracking my performance and exact results
• Identifying my behaviour and adjustment patterns
• Learning from my mistakes
• Strategy refinement
• Improving my trading/planning towards my Long Term goals
• Keeping my emotional discipline and calm

I have been keeping a journal for a couple of years now and I have developed my own way to do it based on my own trading system. Record keeping improves decision-making.

If you are interested in how I manage and track my option trading in a journal spreadsheet, here is a link to learn more about it on my page All In Options Trading Journal or if you are already convinced you need one, check out the spreadsheet in my webshop: All In Trading Options Journal Spreadsheet

Conclusion 

Losing trades or trading mistakes can be frustrating, but they’re also opportunities for growth and also lead to new discoveries and insights.

My advice is to execute on this idea of creating a clear and structured trading plan that you actually stick to. It will give complete clarity in your trading method and will probably also give more emotional calm about your trades.

Remember, it’s essential to continuously educate yourself, stay updated with market trends, and adapt your strategy as needed.

I hope this was helpful. If so let me know in the comments.

Here are other related articles that will interest you :

• Selling Puts – My complete and practical guide
• My Approach to a methodic Options Trading Strategy and Profit Goals
• Introduction to options trading: an attractive investment opportunity for traders

Whenever you’re ready, here are 3 ways I can help you to improve your option trading:

1. For the option traders still looking for a Trading Options Spreadsheet to track their results and improve their trading, check out the EASY “All In Trading Options Journal Spreadsheet”: the ONLY option trading journal designed to focus on parameter-based options trading and account management, as probabilistic-minded options traders like me like it. Checkout this article about the spreasdsheet, the multiple tutorials about the spreadsheet on my Youtube or read about the spreadsheet directly available in our webshop

2. If you are not a Free member of our discord yet : In our discord channels, we team-up with other like-minded option traders, with the aim to support each other and share valuable insights and ideas. I provide live comments, trade alerts, educational info and tools via our discord room. Join anytime ! here: http://discord.gg/cGW6xH4RNT
3. In case you haven’t found me on social media: I suggest to follow me on X @L2TradeOptions and on Youtube @TradingOptionsCashflow to pick up my latest content.

Cheers

TOCF