Hey everyone!

I wanted to share my pre-trade checklist that I use before initiating any option selling trade. Whether you’re just starting or looking to refine your process, having a checklist ensures you’re making informed decisions and not just jumping into trades impulsively. Here’s what I look for:

1. Has Implied Volatility (IV) Increased Recently?

• Why it Matters: Implied Volatility (IV) plays a crucial role in option pricing. When IV increases, option premiums become inflated, giving us an edge as sellers. Higher IV means we’re getting paid more for taking on the same level of risk.
• What I Look For:
• Is the IV over 30%?
• Has it spiked recently compared to its historical levels?

Key Tip: The best trades often come when IV is at elevated levels, but you must also consider why it’s high—earnings reports, market events, or news might be driving the spike

2. Is the Underlying at a Market Extreme?

• Why it Matters: Market extremes often create opportunities for contrarian trades. If the underlying has moved too far, too quickly in one direction, there’s a good chance it may stabilize or revert.
• What I Look For:
• Has the underlying moved significantly up or down in a short time frame?
• Is it near support or resistance levels on the chart?

Key Tip: Selling options during extreme moves helps you capitalize on overreactions.

3. Is the Underlying Liquid?

• Why it Matters: Liquidity is non-negotiable. Liquid assets have tight bid-ask spreads, making it easier to enter and exit trades efficiently. Illiquid options can eat into profits through slippage.
• What I Look For:
• Does the underlying have regular monthly options plus weekly options?
• Are the bid-ask spreads tight?

Key Tip: Stick to popular underlyings like SPY, QQQ, or futures contracts with consistent trading volume.

4. Is the Risk-Reward Ratio at Least 1:3 or Better?

• Why it Matters: The risk/reward ratio determines whether the trade is worth taking. A ratio of 1:3 means that for every $100 of potential profit, I’m risking no more than $300. This ensures I only take trades where the odds are in my favor.
• What I Look For:
• If I allocate $300, can I reasonably make $100?
• Does the trade offer a 70%+ probability of success based on delta and IV levels?

Key Tip: Never settle for a poor risk/reward setup—trading is a probabilities game, and this metric tilts the odds in your favor.

5. Do I Have Highly Correlated Positions?

• Why it Matters: Taking trades on highly correlated assets increases portfolio risk. If one trade moves against you, the other is likely to follow, amplifying potential losses.
• What I Look For:
• Do I already have exposure to assets that move in the same direction?
• For example, I avoid taking simultaneous positions in Euro currency futures and ZB (30-year bond futures) because of their historical correlation. I’ll choose one or the other.

5. Do I Have Highly Correlated Positions?

• Why it Matters: Taking trades on highly correlated assets increases portfolio risk. If one trade moves against you, the other is likely to follow, amplifying potential losses.
• What I Look For:
• Do I already have exposure to assets that move in the same direction?
• For example, I avoid taking simultaneous positions in Euro currency futures and ZB (30-year bond futures). I’ll choose one or the other.

Key Tip: Diversify across uncorrelated assets to spread risk and ensure your portfolio isn’t overly dependent on one market movement.

6. How Much Should I Allocate to This Trade?

• Why it Matters: Position sizing is critical for long-term success. Over-allocating to a single trade can lead to outsized losses, while under-allocating means missed opportunities.
• What I Look For:
• I never allocate more than 3-4% of my portfolio to a single trade.

Key Tip: Diversification within your portfolio helps spread risk and ensures that one bad trade doesn’t derail your progress

Why This Checklist Works

By using this checklist, I ensure that every trade I take aligns with my overall trading plan and risk tolerance. The emphasis on IV, market extremes, liquidity, risk/reward, correlation, and allocation allows me to consistently find high-probability setups while managing risk effectively.

If you’re new to option selling, start incorporating these steps into your own routine. Feel free to share your pre-trade criteria in the comments—I’d love to learn what works for you!

Happy trading, and may the odds always be in your favor!

What do you think? Anything you’d add or change? Drop your thoughts below! 👇