Entering Trades

Different investors have different strategies when it comes to entering trades. As a novice investor, I too have my own set of values and criterion that I adhere to. I tend to flaunt my own rules at times, and that's why I am writing down my rules so that I would remember it.

I only trade in the S&P 500 ETF (SPY) and in Gold (GLD). I find these two counters relatively predictable, relatively safe, and in terms of price fluctuations, it can be tamed and controlled somewhat. I am looking at a strategy that can give me a 90% rate of winning. Of course that said, a 10% rate of losing is terrible. In fact it can be quite damaging to my strategy of preservation of capital. Perhaps I might talk about that in another post.

Here are my 5 steps to entering a trade on my favourite two counters options market.

Step 1:

I don't enter the trade when the weekly option appears on Thursday the week before. Neither do I enter in on Friday, nor on the Monday of the following week. This is because I feel that to enter into the trade at these times would be pre-mature because the market needs to react to whatever that is happening in the week.

Step 2: 

I only consider entering the trade from Tuesday onwards. Which leaves me with a tight window of 4 days to the options expiring. I am guessing that all the stronger price movements would have been washed out on Monday, and so if there are any strong movements in the same direction as Monday on Tuesday, then it is a very suitable condition for me to enter into the trade.

Step 3:

A strong movement in my opinion is at least $2. But this also means Monday it must have already moved $2 in the same direction. If the movement on Tuesday is a knee-jerk reaction to Monday, then I will sit out the trade on Tuesday and look for Wednesday.

Step 4:

If the conditions for Tuesday is met, I will look for the safest trade which offers a bid premium of $0.01 or the return % to risk is 3233.33%. I will enter a trade with a fixed contract size, for a premium to sell a pair at $0.04 minimum.

Step 5:

If the trade is executed, I will monitor the premiums over the remaining days before expiry on Friday. The premiums must not exceed 4 times the premium that I sold the trade for, otherwise, I will initiate a cut loss. If it approaches Friday without incident, I will place a contingent order on the price of the leg that is nearest to the current price and keep my fingers cross. At this stage there is nothing more that can be done.

Step 6: (psychological)

I tend to eye-ball the market, and that's good and bad for someone without a strong psychology. I know I said 5 steps, technically it should be that, an unemotional 5 steps to entering the trade, but I am human, and I don't want to lose money. So my step 6 is a psychological one.

That's all for now!