| Assumption |
Bullish, Bearish, or Neutral
This box will tell you how the strategy profits. Does the share price need to rise (bullish), fall (bearish), or stay about the same (neutral)? |
| Cost Basis |
Credit or Debit
This box will tell you if the strategy will cost you a debit or bring in a credit when you open it. It is your entry price which will be important for calculating your |
| POP |
Low, Moderate, or High
This box lets you know what the typical odds of success are for the strategy. POP tells you the probability of making at least $0.01. Keep in mind that as an option trader you have quite a bit of control over your odds. Most strategies can be adjusted to increase or decrease POP by changing the amount being risked relative to the potential profit. |
| Capital Requirement |
Low, Moderate, or High
This box let's you know how expensive it typically is to hold this type of strategy. Depending on the product type, volatility, and share price, this amount can fluctuate quite a bit. Keep in mind that this is for Retirement accounts and other cash-secured accounts do not get any relief on capital requirements – for those type of accounts capital requirements will always be high relative to a margin account. |
| Break Even (before commission and fees) | This box will tell you how to calculate the break-even. |
| Maximum Profit |
Limited or Unlimited
This box tells you how to calculate the maximum potential profit you can make on the strategy. Some strategies have limited profit potential while others have no limits. |
| Maximum Loss |
Limited or Unlimited
This box will tell you how to calculate your maximum potential loss. Like profits, some strategies have limited loss potential while others have no limits to the amount you can lose. Be careful! This is your ultimate measure of risk. Keep it small! |
| Capital Allocation (per position) |
Percentage of Total Capital
I use this box to tell you the percentage of my total capital I personally feel comfortable risking on a particular strategy. This is different for every person, but in general this is the guideline I stick to: All strategies should take up a low percentage (stay small). After that it's all based on POP. I allocate very little to no capital low POP strategies. High POP strategies might get as much as a 3-5% allocation. Small accounts might have to be more flexible and take larger risks to participate, but the goal should always be to allocate as little as possible to a single trade, regardless of account size. |
| Profit Target | I list my typical profit target in this box. My targets are most commonly 50% of max potential profit but in general, the lower the POP, the lower my profit target. |
| Delta (P/L rate of change) |
Static or Dynamic / Positive or Negative
I describe a strategies delta in this box. Remember that delta indicates several things: Positive or negative delta indicates directional assumption (bullish or bearish). For options, delta also estimates the probability of expiring as well as share equivalency (30Δ ≈ 30 shares). Some strategies have static delta which means their delta remains constant regardless of share price. Dynamic delta, on the other hand, means that deltas will fluctuate depending on how the share price changes. |
| Theta (Time decay) |
Reversible? / Positive or Negative
Theta decay represents time value. Positive theta decay means that the position is naturally inclined to profit off the passage of time. Negative theta means that the position's value will decay as time passes. Theta is always changing, but some strategies maintain either negative or positive theta over the course of their life. If theta is reversible, it means that it can fluctuate between negative and positive depending on |
| Vega (Implied volatility sensitivity) |
Reversible? / Positive or Negative
Vega tells us how sensitive the strategy is to changes. Positive vega means the position is benefitted by expansions (increases) in IV, but hurt by contractions (decreases). Negative vega is the opposite: it is hurt by expansions but benefits from contractions. Like theta, if vega is reversible it means that the strategy can switch between positive and negative depending on moneyness. |
| Gamma (P/L Momentum) |
Reversible? / Positive or Negative
Gamma estimates how fast the deltas of a strategy will change. Another way to think about gamma is P/L momentum. Positive gamma means that your P/L will get faster as you profit, and slow down as you lose. Negative gamma means your P/L will slow down as you profit, but speed up as you lose. Gamma is reversible for some strategies as well – it can switch between positive and negative depending on moneyness. |