Chapter 5: Build a disciplined trading method (Systematic Options Trading)
What separates a consistent trader from a random one isn't intelligence but method: rules written before the trade reduce the effect of emotion on it. This is an example of rules that options-selling traders write, not a recipe for every account.
| Item | Details |
|---|---|
| Entry criteria | Volatility rank (IV Rank) above 30% · delta between 0.20 and 0.30 · 30 to 45 days to expiration |
| Risk management rules | A single trade never exceeds 5% of capital |
| Exit rules (profit) | Closing when half of the maximum possible profit is reached |
| Exit rules (loss) | Closing when the loss reaches twice the premium collected |
| Asset allocation | No single sector exceeds 30% of open trades |
| Documentation | Log every trade: the reason, the entry, the exit and what you learned |
Expectancy: does the method actually make money?
Win rate alone is not enough. A trade that wins $100 70% of the time and loses $250 30% of the time has an expectancy of 0.7 × 100 − 0.3 × 250 = 70 − 75 = $−5 per trade. So the method loses money over the long run even though it wins seven trades out of ten. Edge is a positive expected value after counting all losses.
Why does position size matter more?
With a fixed risk of 5% of starting capital per trade, it takes twenty full losses in a row to lose everything. At 25%, four is enough. Losing streaks happen even to winning methods, so small size is what keeps a trader in the market until the edge works.
Trade journal
A journal is not written for anyone else. It shows which kinds of trades win and which lose. The simplest journal has: date, symbol, strategy, reason for entry, entry and exit, result, lesson. Review the numbers every month. What isn't measured doesn't improve.
Before any real money
Test rules first on a paper account or at small size, to see whether they can be carried out as written. The hardest part of any method is sticking to it on the day you lose.
Summary
A method has three parts: entry and exit rules written before the trade, a small size that can absorb consecutive losses, and a journal you review to measure expectancy. Without the third, you can't tell whether the first two work.
