Hi Mark (and Dimitris),
This discussion is something I find interesting in that I'm curious
to see concrete examples of trading plans at various account sizes,
risk/reward targets, amount of experience, etc.
I find lots of people
write about an option strategy as if it could fit in for anyone at
anytime, yet clearly someone with a small net worth will have a smaller
account size paired with (likely) lower risk tolerance. Whereas someone
with a larger net worth may want to "risk" still a small size but has a
huge risk tolerance. Etc.
What might concrete trades for these
people look like? Especially if they were looking for a way to
implement plans with ICs?
I don't believe I can supply the details that you want to see.
My belief is that the vast majority of traders have no concrete trade plan, and may not even have a vague plan in mind. These traders do whatever they deem necessary at what they consider to be the appropriate time. This can work for very experienced traders, and it certainly saves a lot of work. However, unless a trader makes a serious attempt at writing and using detailed plans, he/she cannot know whether it's worth the effort.
One other 'truth' that is not so obvious: Many traders just don't make it. They are so confident of success that they are untrained and unprepared to enter the trading arena. For some reason, it is commonly believed that little or no training is required and that 'anyone' can make money. There is certainly plenty of hype that suggests that riches are just around the corner.
Thus, it's difficult to reach the 'very experienced trader' stage mentioned above if you don't develop good habits early in the game. And writing a solid trading plan is one of those habits. Anyone can ignore the idea of using trade plans and take the easy path – but it is not the most likely path to success. This game is difficult enough that there is no reason to take this specific shortcut.
To answer your question: My best guess that the plan 'looks like' the individual trader's comfort zone. Iron condors, butterflies, diagonals, etc. can be played in many ways. Choosing strikes, expiration dates, probability of expiring worthless, premium collected etc. allows so many variants, that the original trade is very different from one trader to another.
Then risk management – including original trade size, depends on more than account size. The big risk management decision of when to adjust is not a constant either. Some adjust very early, others wait until the strike is breached. Some roll positions, others don't. Some own insurance, most are not willing to pay for insurance. I don't see how I can provide examples of a plan, unless readers care to share their plans.
The point is I don't know how to define a 'trade plan' that could be considered either 'typical' or a 'place to start.' The only suggestion I have is to trade the condor that feels comfortable and then keep notes in your trade journal. Don't make these comments based on what really works this month – instead, base them on your original trade. Did you choose strikes that are easy to manage? Is your exposure to negative gamma and vega really comfortable? The more you understand if the trade is manageable and comfortable to work with, then the easier it becomes to plan future trades. As you collect data from the comments over time, you can use that information to refine your plan.
Then 'guess' where you would make an adjustment for an iron condor that moves against you and when the time comes – decide at that time how reasonable your 'guess' was. Again, use the journal to evaluate the quality of that guess.
At first, the plan must be flexible as you judge how well the plan is written. As you gain confidence in plan writing, it becomes less flexible. But it is never written in stone. When you have a good reason (reason goes into trade journal for later evaluation), change the plan. But, please – make a new plan and record it. As someone new to plan writing, consider it a guideline only. Do what you feel is the correct decision at the time.
Just remember that one purpose of the plan is to make decisions in advance and reduce the difficulty of making trade decisions under duress. As soon as you see that the plans are fairly good at telling you what to do, then follow them.
As you gain experience writing plans, they will become closer and closer to your real world/real time decisions and you will have the confidence to rely on them.
The two major advantages for the trader who is new to writing plans are:
a) I good, upfront idea is more valuable than a panic decision – or any decision made in the heat of battle. When markets are calmly going against you, there is time to find a good trade. But when markets are moving quickly, that plan becomes valuable.
b) If you are a trader who has not yet (I say 'yet' because this is mandatory for long term success) learned to control emotions, then the plan solves that specific problem – if you follow it.