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Best Practices

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Trading Checklist

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

When looking to set up a trade, it is always important to make sure that you have covered all of your bases. The easiest way to do this is to set up a checklist that covers everything you need to look for when placing a trade. Today, Tom Sosnoff and Tony Battista discuss everything that they look for when looking to place a trade.

Tom and Tony Break down four vital components of placing a trade. First, they discuss liquidity, which is essential to getting in and out of trades. They focus on a tight bid/ask spread of between $0.01 to $0.05, as this reduces slippage. Next, the guys remind everyone of the role of Implied volatility rank (IVR) and why it is so important. IVR allows us to compare apples-to-apples the implied volatilities (IV) of different underlyings and see where IV sits in its annual range.

Tom and Tony also review the importance of underlying awareness. Has the underlying seen an aggressive selloff or rally in recent weeks? Is there an earnings announcement in the next month? Both of these questions we must ask ourselves and be able to answer before settling on an underlying and then selecting a strategy.

Next, there is a comprehensive breakdown of strategy selection for both high and low IV.

The final point is regarding metric awareness of our strategies. What metrics do we need to look at as we set up the trade? The big four to keep in mind are probability of profit, buying power reduction, maximum return on capital, and breakeven prices.

Having these checklists available can allow you to be more mechanical in your trading and helping you to avoid drawdowns that can ruin your account!

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