There are talks of AI everywhere, including in trading.
Let’s see if AI can generate a trading plan for options trading.
There is a proliferation of AI agents, and new ones are always coming online – ChatGPT, Claude, Gemini by Google, Copilot by Microsoft, etc.
Contents
For this example, we will use Grok, developed by xAI, a company Elon Musk founded and launched in 2023.
When Grok asked what it would need to create an options trading plan as an options seller, it gave this response:
>>>>>>>
“To create a tailored trading plan for you as an option seller, I’ll need specific information to ensure the plan aligns with your goals, risk tolerance, and resources.
Here’s what I need from you:
- Trading Goals:
-
- What are you aiming to achieve (e.g., consistent income, supplemental income, capital growth)?
- What is your target monthly or annual return (e.g., 1-2% per month, 10-20% per year)?
- Risk Tolerance:
-
- How much capital are you willing to risk per trade (e.g., 1-5% of your portfolio)?
- Are you comfortable with strategies with defined risk (e.g., credit spreads) or undefined risk (e.g., naked options)?
- What’s your maximum acceptable drawdown (e.g., 10%, 20%)?
- Capital and Account Size:
-
- How much capital are you allocating to options selling (e.g., $5,000, $50,000, $100,000+)?
- Is this in a margin, cash, or retirement account (e.g., IRA, which may limit strategies)?
- Experience Level:
-
- What’s your experience with options trading (beginner, intermediate, advanced)?
- Have you sold options before (e.g., covered calls, cash-secured puts, spreads)?
- Are you familiar with concepts like implied volatility, Greeks (delta, theta, etc.), and margin requirements?
- Time Commitment:
-
- How much time can you dedicate to trading (e.g., a few hours a week, daily monitoring)?
- Are you looking for short-term trades (e.g., weekly expirations) or longer-term (e.g., 30-45 days to expiration)?
- Preferred Strategies:
-
- Are there specific option-selling strategies you prefer or want to focus on (e.g., covered calls, cash-secured puts, iron condors, credit spreads)?
- Are you open to directional strategies (e.g., put selling in bullish markets) or prefer market-neutral (e.g., iron condors)?
- Market Preferences:
-
- Which markets or assets do you want to trade (e.g., stocks, ETFs, indices like SPX, futures, options)?
- Are there any specific sectors or tickers you’re comfortable with or want to avoid?
- Broker and Tools:
-
- Which broker do you use, and what are their commission rates for options (important for profitability)?
- Do you have access to tools for analyzing implied volatility, probability of profit, or trade management (e.g., Thinkorswim, Tastytrade)?
- Risk Management Preferences:
-
- How do you want to manage losing trades (e.g., close at a fixed loss percentage, roll positions, hold to expiration)?
- Are you open to hedging strategies (e.g., buying protective options or using VIX products)?
- External Constraints:
-
- Are there any regulatory or tax considerations (e.g., trading in a taxable account vs. an IRA)?
- Any personal circumstances that might affect your trading (e.g., limited time due to work)?
Once you provide this information, I can design a trading plan that includes the following:
- Specific strategies suited to your goals and risk tolerance.
- Position sizing and capital allocation guidelines.
- Trade entry and exit criteria (e.g., delta, days to expiration, premium targets).
- Risk management rules (e.g., stop-loss levels, adjustment triggers).
- A schedule for trade monitoring and portfolio review.
If you’re unsure about any of these points, let me know, and I can guide you through them or start with a general plan based on common option-selling principles.
What details can you share to get started?
Disclaimer: Grok is not a financial adviser; please consult one. Don’t share information that can identify you.
>>>>>>>
This response indicates that Grok knew what it was talking about.
It knew that the reasonable returns for option selling were 10% to 20% per year (or 1% to 2% per month).
It knew that the capital at risk per trade typically should be 1% to 5% of the portfolio.
It knew that the trading plan would need to consider the trader’s time commitment, account type, experience level, and timeframe preference.
When asking about the trader’s risk tolerance, it suggested a maximum acceptable drawdown of 10% to 20%, which is within reason.
At least it didn’t suggest crazy drawdowns such as 50%.
And finally, it gives the disclaimer that it is not a financial adviser and that you should consult with one.
And not share personal information on a public website.
Next, we feed it the information that it needs by asking:
“Create a trading plan on a $30k margin trading account as an option seller targeting returns of 15% per year. I don’t want drawdowns for more than 10% while risking 2% of my portfolio per trade. I prefer expirations of 30 to 45 DTEs and am open to both directional and non-directional strategies. I have no market preference and am willing to trade indices, ETFs, and stocks.”
And this is what it gave me:
>>>>>>>
Option Selling Trading Plan for $30,000 Margin Account
Objective
- Annual Return: Target 15% per year ($4,500 on a $30,000 account).
- Maximum Drawdown: Limit to 10% ($3,000).
- Risk per Trade: 2% of account ($600 per trade).
- Options Expiration: 30 to 45 days to expiration (DTE).
- Strategies: Mix of directional and non-directional strategies.
- Markets: Indices, ETFs, and stocks.
Account Overview
- Starting capital: $30,000 (margin account).
- Margin Utilization: Use margin conservatively to stay within risk parameters, assuming 2:1 leverage for options selling (e.g., Reg T margin requirements).
- Monthly Return Target: 15% annually ≈ , 1.25% monthly ($375/month).
Risk Management
- Risk per trade: $600 (2% of $30,000).
- Maximum loss per trade is capped at $600, defined by stop-loss or adjustment triggers.
- Maximum drawdown: $3,000 (10% of account).
- Cease trading if the drawdown reaches $3,000 and reassess the strategy.
- Position Sizing:
- Risk $600 per trade, calculated as the difference between entry credit and stop-loss/adjustment point.
- Example: For a short put spread, if credit is $1.00 and max loss is $4.00, the risk is $3.00 per spread. Allocate $600 ÷ $3.00 = 2 spreads ($600 risk for two contracts).
- Portfolio Risk:
- Maximum five concurrent trades (5 × $600 = $3,000 total risk, 10% of account).
- Diversify across uncorrelated assets to reduce systemic risk.
Strategy Selection
Non-Directional Strategies (60% of trades)
- Short Iron Condors:
- Sell out-of-the-money (OTM) call and put spreads on high-implied volatility (IV) assets.
- Delta: 0.10–0.20 for short strikes (10–20% probability of expiring in the money).
- Width: $5–$10 spreads, targeting 15–25% of width as credit (e.g., $1.00–$2.50 credit for $10 spread).
- Markets: Indices (SPX, NDX, RUT), ETFs (SPY, QQQ, IWM).
- Adjustment: Close or roll if the short strike is tested (e.g., delta reaches 0.40).
- Risk: Defined by spread width minus credit (e.g., $10 – $2 = $800 risk per contract).
- Short Strangles:
- Sell OTM calls and puts on low-beta stocks or ETFs with high IV.
- Delta: 0.10–0.15 (10–15% probability of expiring in the money).
- Markets: Stocks (e.g., TSLA, AMD), ETFs (XLE, XLF).
- Adjustment: Roll up/down or close if the short strike delta reaches 0.30.
- Risk: Undefined; cap risk with stop-loss at 2x credit received or $600 max loss.
- Exit Rules:
- Take profit at 50% of max profit (e.g., buy back at $0.50 if credit was $1.00).
- Close at 21 DTE to avoid gamma risk unless the trade is deep OTM.
Directional Strategies (40% of trades)
- Short Put Spreads:
- Sell put spreads on bullish or neutral assets after a pullback (e.g., RSI < 40).
- Delta: Sell put at 0.25–0.30, buy put 5–10 strikes lower.
- Markets: Stocks (e.g., AAPL, MSFT), ETFs (XLK, XLV), Indices (SPX).
- Credit: Target 20–30% of spread width.
- Adjustment: Roll down/out or close if the short put delta reaches 0.50.
- Risk: Defined by spread width minus credit.
- Short Call Spreads:
- Sell call spreads on bearish or overbought assets (e.g., RSI > 70).
- Delta: Sell call at 0.25–0.30, buy call 5–10 strikes higher.
- Markets: Stocks (e.g., NVDA, META), ETFs (SMH, XLY).
- Credit: Target 20–30% of spread width.
- Adjustment: Roll up/out or close if the short call delta reaches 0.50.
- Exit Rules:
- Take profit at 50% of the max profit.
- Close at 21 DTE or if loss reaches $600.
Trade Selection Criteria
- Liquidity: Trade options with:
- Bid-ask spread < 5% of mid-price.
- Open interest > 500 contracts per strike.
- Daily volume > 100 contracts.
- Implied Volatility (IV):
- Target IV rank > 50 for non-directional trades to maximize credit.
- Avoid low IV (< 20%) for directional trades to reduce the risk of reversals.
- Correlation:
- Select assets with a correlation < 0.5 to diversify (e.g., SPY and XLE, AAPL and RUT).
- Earnings and Events:
- Avoid selling options over earnings unless IV crush is favorable and risk is defined.
- Monitor economic events (FOMC, CPI) for indices and ETFs.
Trade Execution
- Market Analysis:
- Weekly: Review IV rank, technicals (RSI, support/resistance), and upcoming events.
- Daily: Check VIX, sector performance, and asset correlations.
2. Trade Setup:
- Identify 2–3 non-directional and 2–3 directional opportunities weekly.
- Prioritize defined-risk trades (spreads, condors) over undefined-risk (strangles).
- Use 30–45 DTE options to balance theta decay and gamma risk.
3. Position Sizing:
- Calculate contracts: $600 ÷ (max loss per contract).
- Example: Iron condor with $800 max loss per contract → 0.75 contracts (round to 1).
4. Monitoring:
- Check positions daily for delta shifts or stop-loss triggers.
- Adjust or close if risk exceeds $600 or at 21 DTE.
5. Profit Target:
- Aim for $375/month ($1,125/quarter).
- Expect a 60–70% win rate with 1:1 risk-reward on average.
Portfolio Allocation
- Asset Classes:
- Indices: 30% (SPX, RUT).
- ETFs: 40% (SPY, QQQ, XLE, XLF).
- Stocks: 30% (AAPL, MSFT, TSLA, NVDA).
- Strategy Mix:
- Non-directional: 60% (iron condors, strangles).
- Directional: 40% (put spreads, call spreads).
- Capital Allocation:
- Deploy 50–75% of capital at any time (3–5 trades).
- Reserve 25–50% for adjustments or opportunistic trades.
Performance Tracking
- Daily Log:
- Record each trade’s entry, exit, credit, loss/profit, and rationale.
- Monitor total account value and drawdown.
- Weekly Review:
- Assess win rate, average profit/loss, and adherence to risk rules.
- Adjust strategy mix if drawdown approaches 5% ($1,500).
- Monthly Review:
- Compare actual vs. target return ($375/month).
- Rebalance asset allocation if one class dominates losses.
Contingency Plan
- Drawdown > 5% ($1,500):
- Reduce position size to 1% risk per trade ($300).
- Shift to 80% defined-risk strategies (spreads, condors).
- Drawdown > 10% ($3,000):
- Halt trading.
- Analyze trade log for patterns (e.g., overexposure to one asset).
- Resume with 0.5% risk per trade ($150) after a 1-month pause.
- Market Stress (VIX > 30):
- Reduce exposure to 2 trades max.
- Prioritize indices and ETFs over stocks.
Example Trade
- Asset: SPY (ETF).
- Strategy: Iron Condor (40 DTE).
- Setup:
- SPY at $500.
- Sell a 460 put, buy a 450 put; sell a 540 call, buy a 550 call ($10 wide spreads).
- Credit: $2.00 ($200 per contract).
- Max loss: $10 – $2 = $8 ($800 per contract).
- Contracts: $600 ÷ $800 = 0.75 → 1 contract.
- Risk: $800 × 1 = $800 (adjusted to $600 via stop-loss at 3x credit, $6.00 debit).
- Exit: Buy back at $1.00 (50% profit, $100) or close at 21 DTE.
- Rationale: High IV rank (60), neutral technicals, no major events.
Tools and Resources
- Platform: Use a broker with low commissions and robust options analytics (e.g., Tastytrade, Interactive Brokers).
- Analysis Tools:
- OptionStrat or Thinkorswim for probability and risk analysis.
- TradingView for technical analysis.
- IV rank data from Barchart or OptionAlpha.
- Education:
- Study theta decay and IV dynamics.
- Review case studies on iron condors and credit spreads.
Notes
- Taxes: Consult a tax professional for short-term capital gains on options.
- Broker Margin: Ensure margin requirements align with Reg T (typically 20–25% of underlying for spreads).
- Discipline: Adhere strictly to risk and exit rules to avoid emotional trading.
This plan balances risk and reward to achieve 15% annual returns while keeping drawdowns below 10%.
Adjust based on performance and market conditions.
>>>>>>>
The trading plan that it came up with is pretty good and quite detailed.
Based on account size, it targets making $375 per month (which is 15% annually ≈ and 1.25% monthly on a 30k account).
The plan has risk management in line with the constraints I gave it.
It says to stop trading when the drawdown reaches $3,000.
It took into account portfolio risk by saying not to put on more than five concurrent trades.’
It suggests diversifying into non-correlated assets to avoid systemic risks.
Regarding position size, it says to risk $600 per trade (which is 2% of the portfolio) and shows how to calculate the number of spreads for a given credit spread.
It suggests a 60% and 40% mix of non-directional and directional trades.
It specifies selling the short options at 10 to 20 delta for non-directional condors.
Meanwhile, for directional credit spreads, it specifies having short options at 25 to 30 delta.
This completely makes sense because we want short strikes closer to the money when making directional plays.
It says to prioritize defined-risk trades because I did not specify whether I wanted defined-risk or non-defined-risk trades.
It gave me plans for iron condors (defined risk) and short strangles (non-defined risk).
I’m glad to see that it made an important point to cap the risk of short strangles by exiting the trade if the loss is greater than two times the credit received or a maximum loss of $600.
It remembered that we didn’t want to risk more than $600 per trade.
It gave Additional exit rules to take profit at 50% of max profit and exit at 21 DTE to avoid gamma risk.
It also had good tips on reducing market exposure when VIX > 30 and reducing position size when the drawdown exceeds 5% (half of the max drawdown).
A very fine plan indeed.
Final Thoughts
AI can be a useful tool in our lives in many respects, including in trading, as we just saw.
However, one also needs to know of its limitations.
There are examples where an AI response was irrefutably wrong.
There are examples where one AI agent gave a completely opposite answer to another AI agent.
Overall, the trading plan that AI came up with is a good plan to start building upon.
You may still want to tailor it to your specific trading style and monitor how well the plan is doing to make adjustments to it as needed.
We hope you enjoyed this article on an example of an AI-generated trading plan.
If you have any questions, send an email or leave a comment below.
Trade safe!
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.
