Importance of Checklists

When trading or investing, having a checklist can make the difference between having a profitable trade or a losing trade. KDK Options had a great example using its own checklist today.

KDK Options was looking at buying Morgan Stanley calls. The price of the stock was in a place where the trade had a good probability of success. The price of the option was lower than thought. The fundamental and technical expectations for the trade were met.

So what caused KDK Options to pull out of the trade? The expiration date of the option did not provide the needed amount of time needed for the trade. The option contract KDK originally started looking at was a May option. The trade looked pretty positive until getting to this one question. Because the expiration would be the third Friday, KDK originally thought that it would be in three weeks! But after answering the question on the checklist, it was made clear that the option only had two weeks left before expiration. This disqualified the trade.

The process of finding the right option trade can be long and tedious. Having a checklist can make that process a little clearer and simpler. It can mean the difference between a profitable trade and a losing trade. In the example above, the checklist highlighted the fact that the time left on the option was not sufficient for KDK Options to make the trade. It does not mean that the trade would not have been successful. It just meant that the probability for success with this trade was not high enough to go through with it.