The Risk Checklist

Every Pilot Uses a Checklist

Airline pilots with 20,000 hours of flight time still use checklists before every takeoff. Not because they forgot how to fly, but because checklists catch the mistakes that experience and confidence cause you to overlook.

Trading is no different. The day you think you do not need a checklist is the day you skip a step that costs you money. This lesson gives you three checklists: pre-trade, daily, and weekly. Use them every time without exception.

Pre-Trade Checklist

Complete this before opening any new position:

1. Market Environment

[ ] What is the VIX? (Record the number: ___)
[ ] Is VIX in contango or backwardation?
[ ] Is the market trending or range-bound?
[ ] Am I in the Low-Vol, Normal, or Spike playbook?

2. Stock Selection

[ ] Does this stock pass my screening criteria? (Market cap > $10B, liquid options, no binary events within 35 days)
[ ] What is the IV Rank? (Must be above 30 for premium selling)
[ ] Why is IV elevated? (If binary event, treat as event trade with reduced size)
[ ] Would I own this stock at my put strike for 6 months?

3. Position Sizing

[ ] What is my maximum loss on this trade? $___
[ ] Is that less than 5% of my account? (Account size: $, 5% limit: $) Yes/No
[ ] After this trade, what is my total portfolio heat? ___% (Must be under 15%)
[ ] After this trade, what is my exposure to this underlying? ___% (Must be under 15%)
[ ] After this trade, what is my sector exposure? ___% (Must be under 30%)
[ ] After this trade, what percentage of my capital is deployed? ___% (Must be under 70%)

4. Trade Plan

[ ] What is my profit target? (Standard: 50% of max profit)
[ ] What is my loss limit? (Standard: 2x credit received)
[ ] What date will I close if neither target is hit? (Standard: 21 DTE)
[ ] Under what conditions will I roll this trade?
[ ] Have I written this plan down in my trade journal?

5. Execution

[ ] Am I entering between 10:00 AM and 3:00 PM ET? (Avoid the first and last 30 minutes)
[ ] Is the bid-ask spread acceptable? (Less than 10% of the option's mid-price)
[ ] Did I use a limit order at the mid-price or better?

If any checkbox is "No" or a limit is breached, do not enter the trade.

Daily Checklist (5 Minutes)

Run this every trading day, ideally between 10:30 AM and 11:00 AM ET:

Market Check

[ ] VIX level and direction (up or down from yesterday)
[ ] SPY — up, down, or flat today?
[ ] Any major news that affects my positions?

Position Review

[ ] Review each open position. Is any position at or near my profit target (50% of max)?
- If yes: Close it.
[ ] Is any position at or near my loss limit (2x credit)?
- If yes: Close it.
[ ] Is any short strike being tested (stock within 2% of strike)?
- If yes: Prepare to roll or close.
[ ] Are there any earnings announcements in the next 7 days for stocks I have positions on?
- If yes: Plan to close before earnings.

Portfolio Health

[ ] Total portfolio heat: ___% (Flag if above 12%)
[ ] Number of open positions: ___ (Flag if above 10)
[ ] Cash available: ___% of account (Flag if below 30%)

Daily review takes 5 minutes. Missing one day can cost you thousands.

Weekly Checklist (Friday Afternoon, 15 Minutes)

Performance Review

[ ] Weekly P&L: $___
[ ] YTD P&L: $___
[ ] Current account value: $___
[ ] Drawdown from peak account value: ___% (Flag if above 8%)

Position Audit

[ ] List all open positions with current P&L
[ ] Are any positions older than 45 DTE from when I opened them? (Possible sign of a trade I forgot to manage)
[ ] Am I overexposed to any sector?
[ ] Is my net portfolio delta reasonable? (Should not exceed 200 for a $50,000 account)

Next Week Planning

[ ] Review earnings calendar for next week
[ ] Review economic calendar (Fed, CPI, jobs data)
[ ] Scan watchlist for new opportunities (IV Rank above 40)
[ ] How many new positions can I open while staying under heat limits?

Journal Entry

[ ] What went right this week?
[ ] What went wrong this week?
[ ] Did I follow all my rules? If not, which did I break and why?
[ ] One thing I will do better next week: ___

Monthly Checklist (Last Friday of the Month, 30 Minutes)

[ ] Monthly P&L and return on account: $____ / ____%
[ ] Win rate for the month: ___% (Target: 65-80%)
[ ] Average win: $___ vs Average loss: $___
[ ] Profit factor (total wins / total losses): ___ (Target: 1.5+)
[ ] Largest single win: $___ and largest single loss: $___
[ ] Maximum drawdown this month: ___%
[ ] Am I following my position sizing rules? Review last 10 trades.
[ ] Is my strategy still appropriate for the current market environment?
[ ] Do I need to adjust my watchlist?
[ ] Am I spending on hedges? How much this month: $___

The Meta-Rule

A checklist only works if you use it. Here is how to make it stick:

Print it out. A physical checklist on your desk is harder to ignore than a mental checklist.

Make it a habit. Do the pre-trade checklist before the first trade every single day. After two weeks, it becomes automatic.

Be honest. If you skipped a step, write it down. If you broke a rule, write it down. The journal is your accountability partner. Over time, you will see patterns — specific rules you tend to break, specific situations where you get sloppy.

Update it. As your experience grows, add items that are specific to your trading. If you notice you keep losing on positions opened on Mondays, add a line: "Am I trading because today is Monday and I feel like I should, or because there is a real opportunity?"

Closing This Course

You have completed the Risk Management Course — the most important course on OptionsNest.

You now understand why traders fail, how to size positions, what portfolio heat is, how correlations destroy false diversification, how to hedge, when to cut losses, how to survive a crash, and how to use checklists to enforce discipline.

None of this knowledge matters if you do not use it. The market does not care how much you know. It cares how much you do.

Trade small. Trade disciplined. Survive. The profits will follow.