Most option traders put a lot of time into planning and executing their trades. They come up with a trading plan, paper trade, tweak and practice. This is certainly an important step and one that should be not taken lightly.
However, once traders have got to this stage, and they start trading, they forget one absolutely crucial aspect of trading and that is reviewing trades and creating a trading journal.
“Keeping records enhances the chance of finding order and meaning in those events” – Aldo Leopold.
As option traders, if we are not keeping good records, how will we know what is working and what is not? How will we know where we can and need to improve?
No matter whether you are just starting out or are a seasoned veteran, keeping a trading journal is one of the most effective ways to improve your trading performance.
Today, we’ll look at how to start an option trading journal, the best format for the journal and the most efficient way to build it.
By the end of this post you will have your own option trade journal to use with instructions on how to complete it in order to help you become a better trader.
Note: If you want to just grab the spreadsheet now rather than reading all the details, you can do so here:
WHY SHOULD YOU KEEP A TRADING JOURNAL?
World-class athletes maintain journals to keep track of their performance which helps them stay motivated to get stronger, faster and perform better. So why wouldn’t we do the same as option traders?
A well-known trading education site says:
“Dedicating yourself to keep a journal will give you important feedback on your performance and show you patterns unfolding that illustrate what is working and what needs to change.”
There are many reasons for starting and maintaining a trading journal including:
1. Improved Performance – Purely by taking a more professional approach to your trading, you will see an improvement in performance. Imagine two traders, one who flies by the seat of his pants and doesn’t record any trading results and another who meticulously captures every detail of every trade.
Which one do you think will be more successful? It’s pretty obvious really.
2. Trading History – It’s amazing what information can be gleaned from a few years’ worth of trading records. Patterns start to emerge. You will be able to look back over your performance history and analyze which trading strategies have performed the best.
Perhaps you thought you were a great Iron Condor trader, but upon analyzing your trading journal, you find that the Poor Man’s Covered Call was by far your best performing strategy. These are things that you would never know without a detailed trading history.
3. Tracking Open Positions – With the journal I’ll share with you below, you can filter your spreadsheet for open positions and even by expiry. I was tempted to add in a column that would show some of the key greeks but decided to leave it out. You could always add these in yourself if you wanted the extra scrutiny of your open trades.
4. Easier Tax Returns – Having all your trading results in once place might make it easier come tax time.
5. Peer or Coach Review – If you decide to join a trading group or get a mentor then having a trade journal will really help your coach understand what your experience level is and where you need help. An experienced trader may also be able to spot trends or patterns in your trading that you did not realize were there.
Hopefully by now you’re convinced about the benefits of a trading journal. Here’s what one of my students had to say:
“I owe my dedication to a trading journal and a trading plan to Gavin and as long as I stick to it, I seem to make money!”
Can’t argue with that!
WHAT INFORMATION SHOULD YOU RECORD IN A TRADING JOURNAL?
Realistically you want to record as much information as possible, but you also don’t want your journal to become a monstrous, complicated mess.
Sometimes keeping it simple is the best method. So, let’s try and find a happy middle ground.
Here are some data points you may want to include:
Trade Date or Entry Date – Start with just the date, but if you feel you need to add in the time of day you made the trade, you can do that. Personally I just use the date.
Underlying Symbol – The stock or Index you are trading. This field can also be filtered once you have a large amount of trades.
Expiration Date – This is important in order to filter open trades that are closer to expiry and may need more attention.
Strategy – Also important for filtering purposes and to see which are your best performing trade types – Iron Condors, Credit Spreads, Poor Man’s covered Calls, Butterflies etc.
Trade Details – List out the actual strikes that you traded.
Entry and Exit Price – The actual trade price of the option spread or contract. You could also add in a column for the underlying price at the time of entry and exit, but that is not essential for all traders.
Greeks – Some traders may want to include some data on the greeks. This might be position delta, delta dollars, theta or vega depending on the strategy. This is not something I include because I usually just monitor that for open trades in Interactive Brokers Risk Navigator.
I also tend to create a detailed trading log for each major trade and track this via a Google doc, whereas the excel trading journal is more of an overall summary. I’ve included an example later in the article.
Implied Volatility – Depending on the strategy, some traders may want to make a note of the implied volatility of the underlying stock or index at the time of trade initiation.
IV Rank – Similar to the above, it might be helpful to know the IV rank at entry and exit of a trade.
Capital at Risk – It’s a good idea to track how much capital was tied up in the trade so you can calculate a return on investment for each trade.
Margin – Similar to above, but some traders that are using Portfolio Margin accounts may prefer to use this figure for their ROI calculation instead of capital at risk.
Notes – It’s always a good idea to add a nice big column at the end to make some notes. Sometimes you might need to make extensive notes if it was a particularly complicated or stressful trade. Maybe it was an iron condor that needed to be adjusted a couple of times or a wheel trade that lasted for a long time. Either way, the notes column may end up being the most important data point in the entire spreadsheet.
Some other things to potentially include in this column:
– Why did you make the trade?
– What emotions did you experience?
– What adjustment technique did you use?
– Lessons learned
Developing a robust process for completing your trade journal is equally as important as what data you include in the journal.
Use a set time each day or week to record your trades. If you are a frequent trader, daily inputs would be best but for low volume traders, once per week should be fine.
Find a process that works for you and try to be consistent with it.
HOW OFTEN SHOULD YOU REVIEW YOUR JOURNAL?
I find it best to review my trades on a monthly basis, but it could just as easily be quarterly for low volume traders or even weekly for those crazy traders that like to do more than 20 trades per week.
Again, it’s important to find a process and routine that works for you based on your trading style, and be consistent with it!
HOW TO SET UP AN TRADING JOURNAL SPREADSHEET
A lot of old school traders will have a written trade journal in a notebook, and that might work for some, but I definitely find excel the best. There are so many ways to manipulate that data, filter and create graphs that makes analysis very simple.
Luckily for you, you don’t have to set up an excel template from scratch as I have you covered.
I’ve update to a new version as my old one was 3-4 years old. Some of you may have the old one, so you might want to download the new, completely free version below
This journal has been specifically created for option traders rather than stock, futures or day traders.
It’s important to note, you don’t have to use it in this exact format. Feel free to tweak it a little bit to include things that are important to you or remove things that you feel are unimportant.
I’ve also created an Account Summary tab where you can track your account balance, YTD return and daily Theta percentage. I think it’s good to have a big picture summary as well as looking at the individual trades so you can quickly and easily see how your year is tracking.
SETTING UP INDIVIDUAL TRADE LOGS
In addition to having an excel summary, I also like to have a detailed trade log for important trades. Within this I can go into much more detail than can be crammed into one line of excel.
I compile these trade logs as Google docs and take screenshots of the underlying stock or index chart, the greeks at trade initiation and the payoff diagram.
Then, I do the same thing each time I make an adjustment and include some commentary as to why I’m making the adjustment, where I’m setting my new stop loss, profit target and adjustment points.
TRADE JOURNAL SOFTWARE
Another approach to trade journaling is using software. Excel is perfect for me, but other people may prefer more automated software.
Two examples are TraderVue and EdgeWonk. I haven’t used either of these personally, but they seem to have good reviews.
If anyone has any experience with either of these products, please let me know in the comments.
It doesn’t matter how you do it – pen and paper, excel or software, what is important is that you do it!
A good options trading journal should have plenty of data, but not be to onerous to maintain.
Once you have some trade history in there, review it religiously and try to spot any problem patterns or areas for improvement.
As traders we always need to be striving to be better and find ways to gain more of an edge.
While keeping a trading journal may not seem that exciting or important, it really is and I guarantee if you do it properly, it will make a big difference to your trading.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.