Options Trading Journal

How to Write an Options Trading Journal

Trading requires discipline and consistency, but how do you know your trading style incorporates either of them? What if you can monitor your trading activity? How can you monitor your trading mannerisms? The answer to these questions is writing a trading journal of whatever you do from the moment you open a trade to the moment you close it.

Keeping a trading journal is the key to maximizing your profits when trading options. Journal writing for Options Trade refers to the practice of maintaining a detailed record or journal of your options trading activities. This journal serves as a valuable tool for traders to track their trades, analyze their strategies, and make informed decisions in the future. This article aims to elaborate on the main components of a trading journal for options trading. Additionally, the article helps you design your trading journal by providing some guidelines. So, if you want to revolutionize your trading experience by keeping a journal, this article will get you there.

 

What kind of information does an options trading journal include?

Date and time of the order

First things first. Just like any other kind of document, a trading journal must include information about the date and the time of trading. The market does not always have the same trading volume, thanks to different time zones. For example, at the final hours of the market, trading volume plummets as fewer and fewer traders execute orders in that time. Therefore, knowing the date and the time of the trades as well as their results, can give you an understanding of trading cycles during the market’s active time.

Underlying asset

Equally important as the date and time of the trade is the underlying asset. What is it that you are trading? The trading must include information about the asset, including its name and symbol. If you are using MS Office products to keep track of your orders, you can conveniently sort the assets alphabetically or in any desired order. But you can do it the old way using a pen and paper and drawing a little star next to your favourite asset’s name.

Order Information and Trading Data

Are you bearish or bullish on the underlying asset? The trading journal must clarify the type of order. The primary types of orders in the options market are call and put. In a call order, the trader anticipates the underlying asset’s value to ascend to a certain amount (strike price) in a predefined period (expiry date). Inversely, in a put option, the trader expects the underlying asset’s value to decrease to the strike price within the expiry date previously set in the contract. So, your trading journal must specify the order type, the strike price, and the expiry date to give you interpretable data for future trades. You can read more on order type in the options market here.

Trade Exit Details

The trading journal must include details on the order’s exit point. You need to write down when and what time you exited the trade. This information can help you figure out the average time an order is active. Additionally, the information under exit details illustrates the percentage of your wins and losses. You must specify the reason for closing or exiting the order. Was it because the order reached the profit target? Did the order close because it hit the stop-loss level? Or was it for any other reason?

Option Premiums

Another piece of information the trading journal must present is the premium. Premium is one of the trading costs and refers to the price you must pay to own an option contract. In other words, the premium is the amount an options trader pays or receives when purchasing or selling an options contract. You need to mention how much you paid for the premium in your options trading journal to precisely calculate your net worth afterwards. The amount you pay for the premium discloses the time intrinsic value and time value of the option contract as well as its intrinsic value, interest rate, and the underlying asset’s volatility. Therefore, the premium amount is not just about the value of the contract; over time, it gives you invaluable information about the asset and how popular it is among options traders.

Trade Strategy

The trading strategy in your trading journal contains information about how you handled the order. What was the reason that compelled you to enter the trade, and how did it turn out? This part of the trading journal requires more details and hence, more time. For the information regarding your trading strategy, you write down several items.

Strategy name

Write down the name of the strategy based on which you decided to execute the order. The common options trading strategies already have unique names, such as Covered Calls or Iron Candor. But if you come up with a strategy of your own, you must assign a clear and concise name to your strategy to avoid confusion.

Strategy objective

You must specify what the aim of using a particular strategy was. There are various options trading strategies, each prioritizing one factor over the others, but ultimately, they aim to increase your profits. These strategies can be used to generate income, hedge your investments against market volatility, or appreciate your capital.

Strategy rationale

Strategy rationale is the thought process behind choosing a particular trading strategy. This section provides insights into the reasons, analyses, and expectations that influenced your decision to implement the strategy. One of the things that direct you toward a certain strategy is your general outlook on the market, whether you think an asset’s price will increase, decrease, or move sideways. The next factor that drives you towards a strategy is your analysis of the market. Your analysis can be rooted in fundamental elements such as earnings reports, industry trends, regulatory changes, or other developments that might impact the asset’s price. It can also be rooted in technical analysis, where you decide to open a position based on the signals generated from candlestick patterns and technical indicators. Regarding fundamental and technical analysis, the trading journal can help you understand whether they correlate or not.

Economic calendar events can also help you with your trading rationale. Such events usually cause volatility in assets’ prices, and you need to work out a suitable strategy to offset its effects. The next element in trading rationale is your expectations regarding the longevity of the order. If you are looking for short-term profits, you may use technical tools to generate quick entry and exit points. On the other hand, if you desire substantial profits in the long term, you can rely on fundamental analysis to predict the future value of an asset in the next few years. Finally, you should figure out the market sentiment as it influences your decision choice of strategy. Are your strategies in trading in line with the market sentiments? If so, how many of them have closed in profit, and how many in loss?

Risk Management

Risk management is a crucial section in an options trading journal. A good risk management scheme controls your losses. For noting risk management information in your trading journal, firstly, you need to know your account size and the percentage you are willing to risk. Secondly, based on your account size and your risk tolerance, you decide on the trade size. Keep in mind that you need to diversify your investment, and you are best to avoid investing a considerable sum in a single trade. Thirdly, you must include information about the risk/reward ratio; what percentage of your investment are you willing to risk for how much gain? For example, a 1:2 ratio indicates that you are willing to risk one per cent of your capital to gain 2 per cent. It is best if you also write down the actual amount you are risking, as it gives you a tangible idea of how much money you are spending for a position.

Trade Outcome and Trading Performance

When you close a trade or when it closes, you must write down the reason it happened. Did the order close because it hit the stop-loss level or the target, or did it close at breakeven? Knowing the reason helps you gauge the effectiveness of your strategy and risk management plan. The trading performance includes information such as the end result (win, loss, or breakeven), the amount of loss or profit in monetary terms, the percentage gain or loss relative to your trading accounts’ size, and the reason(s) behind the outcome. By noting the trade outcome, you can later find the pattern in your trading style and evaluate your performance. It helps you decide whether you need to change your trading strategy and risk management or not.

The information under “Trade Outcome” also allows you to discover your trading weaknesses and strengths. Moreover, writing down the trade outcome enhances your psychological state as it allows you to reflect on your emotions and their effect on your judgment.

Emotional Notes

Tracking emotions in your trading notebook is critical for understanding their impact on your actions and performance. Begin by monitoring your emotional state before during, and after the end of each trade, describing feelings of confidence, worry, or relaxation. You should record your emotional reactions to price swings and how they influenced your decision-making, such as spontaneous acts or deviations from your plan. You should also consider post-trade emotions such as relief, disappointment, or other emotions, as well as tactics you used to manage emotions during trading. Evaluating patterns over time might help you identify triggers and make progress in emotional discipline. By taking notes of your learnings and action steps for managing emotions more effectively in the future. By continuously capturing emotional insights, you will develop self-awareness, make more rational decisions, and refine risk management procedures, ultimately leading to higher trading success.

Market Conditions

Market conditions are another important part of your trading journal. To report the market conditions, you need to monitor the current trend, volatility, and important support and resistance levels. Furthermore, you should describe any news events, economic releases, or general market mood that influenced the trading environment. It is best if you consider seasonal trends, time of day, and worldwide events and explain their probable impact on your transactions. Additionally, you can document observations about market structure, correlations with related assets, and liquidity levels to offer a thorough view of the market backdrop for each deal.

Screenshots and Charts

A picture is worth a thousand words! Taking screenshots of the chart can significantly supplement your trading journal and enhance the depth of your trade analysis. You can take a screenshot of the chart featuring details on the market conditions before, while, and after your trade which facilitates your pattern recognition. Moreover, if you want to consult an expert about your trading method, screenshots can help them provide you with precise insights. Of course, you need to organize and sort your screenshots in any order that suits you; otherwise, the visual information can confuse you.

Review and Analysis

The final step in keeping a journal of your trading is reviewing the previous trades. Without reviewing your previous trades in your trading journal, you have gone through the trouble all for nothing. It is in the review stage that you can identify the patterns in your trading method, analyze your wins and losses, learn from your mistakes, and recognize areas for improvement. Through having a trading journal, you can boost your trading edge.

By keeping a well-organized notebook, you can gain a better understanding of your trading strengths and weaknesses, modify your tactics, and make better judgments in the future. Reviews can also help you maintain discipline, regulate emotions, and become a more effective options trader in the long run.

Additional Notes

If there is any other information that you might think will help you for future trades, you can note it under “Additional Notes.” This section is helpful in the case of any peculiarities in the market that you do not usually come across.

 

Why do traders need to keep a journal of their activities?

Trading requires discipline and perseverance, and traders need to monitor their behaviour while trading assets. A trading journal can greatly help you reflect on your trading method find the negative aspects and try to mend them. Below are some of the reasons why you need to keep a trading journal as an options trader.

Self-Reflection and Learning Through Trading Data

Maintaining a journal allows traders to reflect on their decisions, strategies, and outcomes. By reviewing past trades, traders can learn from both successful and unsuccessful experiences, identifying patterns, mistakes, and areas for improvement. This self-reflection is crucial for continuous learning and skill development.

Accountability and Discipline

A trading journal holds traders accountable for their decisions. Writing down the rationale behind each trade and reviewing it later helps ensure that trades are based on well-thought-out strategies rather than impulsive decisions driven by emotions. This practice promotes trading discipline and reduces the likelihood of making rash decisions.

Strategy Evaluation and Trading Data Tracking

Traders can evaluate the effectiveness of different strategies by analyzing their journal entries. They can identify which strategies are consistently profitable and which ones need adjustment or abandonment. This helps traders refine their approaches and focus on strategies that align with their strengths.

Emotional Management

Trading can be emotionally taxing, especially during periods of volatility. A journal provides a space for traders to document their emotional state during trades. This self-awareness helps traders recognize when emotions might be clouding their judgment and enables them to make more rational decisions.

Trading Performance Tracking

A journal serves as a record of a trader’s overall performance. It allows traders to track their progress over time, measuring factors such as win-loss ratio, average gains, average losses, and overall profitability. This tracking helps traders understand their long-term progress and assess whether they are meeting their financial goals.

Decision-Making Improvement

Analyzing past trades can reveal patterns of behaviour or mistakes that traders may not be aware of in the heat of the moment. This awareness enables traders to fine-tune their decision-making processes, avoid repeating mistakes, and enhance their trading performance.

Future Planning

A trading journal provides valuable insights for future planning. Traders can review their successful trades to identify strategies that consistently work and replicate those successes. They can also identify mistakes and develop strategies to avoid similar errors in the future.

Accountability to Investors or Partners

For professional traders or those managing others’ funds, a trading journal provides transparency and accountability. It demonstrates that trading decisions are based on careful analysis and well-defined strategies.

Compliance and Tax Reporting

A trading journal can serve as documentation for compliance purposes and tax reporting. Having a detailed record of trades, dates, and outcomes can help traders meet regulatory requirements and accurately report their trading activities for tax purposes.

 

Tips for creating a practical options trading journal

Based on the above descriptions, we can summarize the instructions for writing each section of the trading journal into several tips.

1-     Choose a Format

Decide whether you want to maintain a physical journal or a digital one. Digital options might include spreadsheets, note-taking apps, or dedicated trading journal software.

2-     Consistency

Commit to entering trade details consistently for every trade, whether it’s a winning or losing trade. This consistency will help you gather accurate data for analysis.

3-     Include Key Information

Each journal entry should include essential trade details such as date, time, underlying asset, option type, strike price, expiration date, premium paid or received, and the number of contracts.

4-     Trade Rationale

Document the reasons behind each trade. What analysis or indicators influenced your decision? This helps you understand your mindset at the time and evaluate the effectiveness of your strategies.

5-     Strategy Description

Explain the trading strategy you employed for each trade. Was it a covered call, straddle, butterfly spread, etc.? Describe the intended outcome of the strategy.

6-     Risk Management

Record your risk management parameters, including the maximum risk you’re willing to take, stop-loss levels, and position sizing relative to your overall portfolio.

7-     Emotional Notes

Document your emotional state before, during, and after the trade. This helps you track how emotions impact your trading decisions and performance.

8-     Trade Exit

Note the reasons for exiting a trade, whether it’s reaching a profit target, hitting a stop-loss, or other factors.

9-     Market Conditions

Record any significant market events, news releases, or trends that could have influenced your trade. This helps you contextualize your trade outcomes.

10-  Trade Outcome (Profitable Trader Results)

Document the final outcome of the trade in terms of profit or loss. Include any lessons you learned from the trade.

11-  Lessons Learned

Write down insights gained from each trade. What worked well? What could be improved? This is where you capture your learning process.

12-  Review your trading performance Regularly

Set aside time to review your trading journal periodically. This could be weekly, monthly, or after a significant number of trades. Look for patterns, assess your performance, and adjust your strategies accordingly.

13-  Include Screenshots/Charts

Attach screenshots of trade setups, entry/exit points, and relevant charts. Visuals can help you recall trade setups and analyze them more effectively.

14-  Use Categories/Tags

If using digital tools, consider using categories or tags to organize your trades by strategy, asset type, or any other relevant criteria.

15-  Stay Honest and Reflective

Be honest in your trading journals entries. If a trade was influenced by emotions or impulsive decisions, acknowledge it. This self-awareness is crucial for growth.

16-  Set Goals

Include personal goals in your trading journals. Regularly assess how your trades align with these goals and adjust your strategies accordingly.

17-  Stay Secure

If using digital tools, make sure your trading journals are stored securely, especially if they contain sensitive financial markets’ data.

Keep in mind that your trading journals are a personalized tool. Customize it to suit your trading style and preferences. The goal is to have a comprehensive record that helps you improve your trading skills, manage emotions, and make informed decisions.

 

Journal writing example

Now that you know the basics of a trading journal, let’s take a look at an example. By maintaining a journal entry like this for each trade, the trader can easily review their decisions, outcomes, emotions, and strategies over time. This information becomes invaluable for learning, improving, and making informed decisions in the future. You can find various trading journal templates here.

• Trade Journal Entry Details:
• Date: August 9, 2023
• Time: 10:15 AM

 

• Trade Details:
• Underlying Asset: XYZ Corporation (Stock Ticker: XYZ)
• Option Type: Call Option
• Strike Price: $150
• Expiration Date: September 20, 2023

 

• Strategy:
• Engaging in a bullish strategy due to strong earnings forecasts and positive technical indicators.

 

• Trade Execution:
• Premium Paid: $5.50 per contract
• Quantity: 3 contracts

 

• Risk Management:
• Maximum risk: $1,650 (premium paid × number of contracts)
• Stop-Loss: $1.00 loss per contract

 

• Trade Exit:
• Exit Date: August 15, 2023
• Exit Time: 3:45 PM
• Reason for Exit: Price reached the initial target of $8.00, a 45% profit.
• Premium Received: $8.00 per contract

 

• Outcome and Analysis:
• The trade achieved the intended profit target.
• Successful execution of the bullish strategy based on earnings and technical analysis.
• Initial stop-loss not triggered; trade developed positively.

 

• Emotional Notes:
• Felt confident in the analysis at entry.
• Minor anxiety as the price approached the profit target.
• Emotions did not influence trade decisions significantly.

 

• Market Conditions:
• Positive market sentiment due to overall strong earnings season.
• No major news affecting the underlying stock during the trade duration.

 

• Lessons Learned:
• The analysis based on earnings and technicals was effective.
• Setting a clear profit target helped manage emotions during the trade.
• Further, explore similar bullish strategies for stocks with strong fundamentals.

 

• Screenshots/Charts: (Attach screenshots of the trade setup, entry, and exit points, if possible)

 

• Overall Trade Performance:
• Profit: ($8.00 – $5.50) × 3 contracts = $7.50 × 3 = $22.50
• Net Return: ($22.50 – $16.50) / $16.50 = 36.36%

Notably, there are some apps as the Trading Journal app which can help traders to have a trading journal within an online platform. These apps could be free or paid and you can access them from everywhere through the internet and you do not have to carry a notebook. Some trading platforms also provide online trading journal apps.

Final Words

Trading is not a haphazard job and requires discipline and consistency. The best way to organize your trading activity is to keep a trade journal tracking all the details of your orders. The information in a trading journal helps you find the flaws in your trading strategy and adjust to increase your profits. Keeping a journal might seem time-consuming, but it is a worthwhile task and makes you a professional trader in a relatively short period. Without a journal, trading becomes an exhaustive activity, and your capital wears off over time. This article described the components of a comprehensive trading journal and brought up an example to clarify what you need to write down for each section.