Pre-trade evaluation

Options Risk Checklist

Work through each item before entering a position. Critical items carry the most weight in the verdict.

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Check off each item as you verify it. The verdict updates as you go.
Volatility & Pricing
IV Rank is below 40%
Options are cheap relative to the past year. Buying calls at high IV rank means paying a premium that must be overcome before the stock even moves.Buying puts at high IV rank means overpaying for protection — often near a bottom when fear is already priced in.
Schwab Options Chain ↗ Robinhood Options ↗ Market Chameleon (IV Rank) ↗
critical
No major catalyst within 2 weeks
Earnings, FDA decisions, and macro events spike IV before and crush it after. Being long through a catalyst means IV crush can wipe gains even if direction is right. If a catalyst exists, price it in explicitly.
Schwab Earnings Calendar ↗ Robinhood Earnings ↗ Earnings Whispers ↗
critical
IV is at or below historical volatility (HV)
If IV >> HV, the market is pricing in more movement than the stock has historically delivered. You're paying for volatility that may not materialize.
Schwab Options Chain ↗ Market Chameleon (IV vs HV) ↗ iVolatility ↗
moderate
IV is in line with sector and industry peers
50% IV is normal for biotech, extreme for utilities. Compare to peer stocks to judge whether this option is genuinely expensive or just reflecting the sector baseline.
Schwab Sector Research ↗ Market Chameleon IV Rankings ↗
moderate
Greeks & Structure
Theta decay is acceptable for your timeline
Multiply daily theta × days to expected move. If that total exceeds 20–25% of premium paid, time cost alone may kill the trade — even if direction is right.
Schwab Options Chain (Greeks) ↗ OptionStrat (P&L sim) ↗
critical
Delta reflects your conviction level
Deep ITM (delta 0.70+) for high conviction. ATM (0.45–0.55) for balanced exposure. OTM (<0.35) only if expecting a large move — treat it as a lottery ticket.Deep ITM (delta −0.70+) for high-conviction hedges. OTM puts are cheap but rarely pay off without a significant decline.
Schwab Options Chain (Greeks) ↗ OptionStrat ↗
moderate
Sufficient open interest and liquidity
Thin options have wide bid-ask spreads that silently eat returns. Aim for open interest > 500 and a bid-ask spread under 5% of the mid price.
Schwab Options Chain ↗ Robinhood Options Chain ↗
moderate
Expiration gives 2–3× the time your move needs
If the move takes 2 weeks, don't buy a 2-week option. Give yourself buffer for the trade to play out and recover from temporary moves against you.
low
Directional Thesis
You have a specific, articulated reason for the move
"I think it goes up" is not a thesis. What is the catalyst or mispricing? When does the market recognize it? Options require a directional bet and a timing bet — both must be right.
critical
Breakeven is a realistic price target
Breakeven = strike + premium paid (call)= strike − premium paid (put). The stock must reach this level just to break even at expiration. Is that move realistic?
Schwab Options Chain ↗ OptionStrat (P&L sim) ↗
moderate
Defined exit plan — profit target and stop loss
Decide before entry: at what gain do you take profits? At what loss do you exit? Options can go to zero. A 40–50% stop-loss on premium paid is a common rule.
low
Volatility & Entry Pricing
IV Rank is below 30–35%
LEAPS carry very high vega. Entry IV matters more here than in any other strategy — a drop in IV over months can silently destroy value even as the stock moves your way. This is the #1 LEAPS killer.
Schwab Options Chain ↗ Robinhood Options ↗ Market Chameleon (IV Rank) ↗
critical
Vega drag scenario has been modeled
If IV drops 10–15 points after entry, how much do you lose from vega alone? For a 2-year LEAP with vega 0.30, a 15-point IV drop = −$4.50/share before the stock moves at all. Run this number explicitly.
Schwab Options Chain (Greeks) ↗ OptionStrat (P&L sim) ↗ iVolatility ↗
critical
IV is at or below historical volatility
You want to buy future volatility cheap. If IV is already above HV, you're paying a premium for volatility that has historically not materialized over multi-year periods.
Schwab Options Chain ↗ Market Chameleon (IV vs HV) ↗
moderate
Rate & Macro Sensitivity
Interest rate environment considered (Rho risk)
Rising rates hurt long call LEAPS. Rho is meaningfully negative for multi-year calls — factor in ~1–3% additional headwind per 1% rate increase over a 2-year horizon.Rising rates help long put LEAPS (positive rho). But falling rates in a crisis often coincide with falling stocks — check whether your thesis is independently rate-sensitive.
Schwab Economic Research ↗ CME FedWatch ↗ Treasury Yield Curve ↗
critical
Rate trajectory over the option lifespan considered
A 2-year LEAP spans multiple Fed cycles. Rising rates in 2022 destroyed LEAPS that looked cheap at entry. Consider where rates are heading, not just where they are today.
moderate
Structure & Position
Breakeven is achievable within the timeframe
A 2-year ATM LEAP costs ~15–20% of stock price. The stock must exceed that just to break even at expiration. Model it: is a 20%+ move realistic within 2 years?
Schwab Options Chain ↗ OptionStrat (P&L sim) ↗
critical
Using as stock replacement? Delta is 0.70+Using as portfolio hedge? Delta is −0.70+
Deep ITM LEAPS (delta 0.70–0.85) behave like leveraged stock with defined downside. ATM LEAPS are cheaper but require a larger move and carry more vega exposure.Deep ITM puts give near 1:1 downside protection. OTM puts are cheaper but often expire worthless — treat as insurance, not a profit center.
moderate
Roll plan decided before the 6-month mark
Inside 6 months, theta accelerates and the LEAP becomes a short-dated option. Decide in advance: roll to a new LEAP, take profits, or let it run. Rolling incurs spread costs — factor these in now.
moderate
Stock doesn't pay a significant dividendDividend impact acknowledged
LEAPS holders don't receive dividends. For high-yield stocks, the drag over 2 years can be significant versus owning shares outright.Dividends reduce stock price on ex-date, which can work in a put holder's favor — but it's already priced into the premium.
Schwab Dividend Info ↗ Robinhood Stock Page ↗
low
Long-term Thesis
Thesis is durable over multiple years, not just near-term
LEAPS are for conviction plays — structural tailwinds, market share expansion, product cycles. If your thesis resolves in 3 months, buy a 3-month option. Short-term momentum doesn't belong in a 2-year contract.
critical
Position sized for total-loss scenario
LEAPS can go to zero. Most traders limit LEAPS to 2–5% of portfolio per position. The leverage is attractive — that's exactly when to be disciplined about sizing.
low
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