A trade plan records the decision before its outcome is known. It should be specific enough that another reader can identify what is being traded, why it was chosen, how much can be lost and what would change the decision. A strategy name alone answers none of those questions.
Write the thesis and its limits
State a scenario and horizon: for example, “I am evaluating a moderate rise over six weeks, without holding through the next earnings report.” Then state the observation that would invalidate it. Distinguish an underlying-price view from a volatility view. A long call combines both; being right about direction may not offset paying too much time value.
List scheduled events, ex-dividend dates and known corporate actions. Record the source and time of quotes. If event timing cannot be confirmed, that uncertainty belongs in the plan rather than being silently treated as no event.
A complete illustrative plan
| Decision | Recorded plan |
|---|---|
| Structure | Buy $100 call; sell $105 call, same expiry and standard deliverable |
| Entry | One spread; no more than $2.00 net debit, plus $4 budgeted round-trip costs |
| Risk budget | $204 total modeled loss budget; no additional unit without a new review |
| Review | Check thesis and liquidity after material news; assess exit before the event deadline |
| Contingency | Verify funding and broker procedures if the short leg is assigned |
The spread’s maximum expiration value is $500. At a $200 debit and $4 costs, a fully realized maximum outcome would be $296 profit. A stop instruction is a separate exit mechanism, not proof that loss is capped at the stop price.
Define what happens next
Set conditions for closing, reducing or reassessing the position. Specify whether those conditions refer to executable option prices, the underlying, time or the thesis. A rule that depends on a midpoint during a wide market may not be executable. Decide how an unfilled exit order will be handled and how to contact the broker if an exercise deadline or platform outage intervenes.
A roll is a new decision with new exposure. Write the realized loss on the old trade separately from the replacement premium and maximum loss. Moving an expiration does not erase the first decision’s economics.
Separate process from result
After closing, compare the actual fills, holding period and actions with this record. A winning trade can violate its risk budget; a losing trade can follow a sound process. Use the checklist for preparation and the journal for review. Position limits and percentages in examples are teaching inputs, not a recommended allocation.
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Reviewed . Examples are illustrative; verify exact contract and broker terms.
References: OIC: exercise procedures; FINRA Rule 4210.