Last week I laid out the mindset that I apply to my trading. I treat it like combat. Period.

A hostile environment that requires intelligence gathering, detailed planning, discipline, and risk management. There's a winner and there's a loser. Super execution is required to win. One wrong squeeze of the trigger and it's over with. You need to know when to abort to minimize losses so you can live to fight another day.

This is an environment that I am very comfortable working in and the same processes and methodologies that helped us win in combat are the same ones I apply to my trading.

Let's apply some combat trade planning to a well known name in the alternative energy sector, First Solar ( ( FSLR). I'll employ a proprietary seven-step planning process that we teach in depth at Fox3 Options .

Strategic Mindset: All of your trading must start at the strategic level, not the tactical level. Strategy guides tactics, not the other way around. When you hear someone say "I'm going to use this strategy" and then lays out a specific trade...run...run as fast as you can.

Someone who doesn't know the difference between strategy and tactics is going to make a smoking hole in the ground. That person is going straight to tactical execution without doing the proper planning. Not good.

We have four strategic trading mindsets: Bullish, Bearish, Volatile, and Neutral. With the current market conditions my strategic mindset is Volatile.

Target: Our Target is simply the underlying asset we are looking to open a position on. We are targeting an asset because we have clearly defined our Strategic Mindset on the target and we think we can profit from an options position supporting this mindset.

It is earnings season and looking at my radar I've selected a target (stock) that I think is a perfect candidate to trade in this volatile market: FSLR.

Fundamental data: Earnings should be coming out between July 3 to August 9. The specific date is not set with FSLR and floats for different periods.

Technical data: Long-term resistance is $160. Long- term support is $100. The trade takes advantage of an upward move in FSLR. This trade will not lose if the stock remains sideways or falls, supporting our Volatile strategic mindset.

Volatility data: Current implied volaltility is 49.45%. Historical 52- week volatility ranges between 28% and 59%.

Trade Commit Criteria: Commit Criteria is our justification for entering into a trade. Commit Criteria should be easily understood and explained in one to three sentences. Commit Criteria is supported by our Strategic Mindset, our fundamental and technical analysis, and the volatility of the target.

We are seeing a real push-pull in the markets lately. This is to be expected with earnings season in its early days. The market wants to see some direction from the large companies to find direction in itself. With earnings in mind the trade takes this into account. This trade will take advantage of an upward move in the stock but will not be hurt if the stock falls.

Intermediate Tactic: With our intelligence gathering complete, we can now select the tactic. At Fox3 Options a "tactic" is the option position we are employing and there are many different positions we can open using options: long calls, short puts, condors, butterflies, credit spreads, calendar spreads, etc. Now you can see how people who fly immediately to the tactic (or 'strategy' for those weekend warriors) can get into trouble in a big way.
  • Broken wing butterfly
  • Three leg position
  • Takes advantage of a targeted upward move

Tactical Employment: Outlining the tactical employment lets us know what we are getting into when we enter a trade. Think of Tactical Employment as defining the performance envelope for our trade. It defines the parameters where the trade should perform.
  • Buy 1X August 150 call
  • Sell 2X August 155 call
  • Buy 1X August 165 call
  • This is a zero entry debit. The 'X' represents the amount of additional contracts an investor might want to trade.

Greeks Effect: We need to know how the Greeks will impact our trade.
  • Theta: will be positive going into expiration with the stock near our target of $155
  • Vega: will neither help nor hurt us on this trade.
  • Delta and Gamma: will help us provided the stock move in our direction, but will not hurt us should the stock retreat.

Midcourse Guidance: Mid-Course guidance encompasses our trade management plan. The term comes from an air-to-air missile and refers to the control of the missile until just before it reaches the target. At Fox3 Options, mid-course guidance encompasses our risk management parameters in terms of profit objective and max allowable loss, threats to success, contingency plans and exit criteria.

Max profit goals and max allowable loss are independent trader decisions based on individual investment objectives and risk tolerance. When setting our max allowable loss we determine the max we are willing to lose to see if this trade will work out for us. This does not mean we have to wait to reach this point to get out; it's simply defining the most we are willing to lose.

This keeps us from saying to ourselves, "I just need a few more days for this to work!" or "I love this trade, it will come around", and we stay in a losing trade. If we hit our max allowable loss, we get out; mend our wounds and move on to the next trade. We also debrief to make sure we garner a couple lessons learned so we make sure we don't repeat these same mistakes down the road.

Threats to success are occurrences that can negatively affect our position during the life of the trade. For instance an unexpected increase in implied volatility due to some negative news or economic report could be a threat to success.
  • If the stock stays where it is currently or falls we will do nothing and let the trade expire worthless which is where we entered.
  • If the stock rises in an orderly fashion we will do nothing as this is our prognosis
  • If the stock goes above the $160 point, which is our area of loss, we will look to exit if the move upward is strong
.

Contingency Plan: Contingency Plan is simply having a basic game plan if our trade is not going per plan: do we roll up, roll down or get out? This is where we 'What if?" the trade. Our Exit Plan is our no questions asked, just get out of this trade criteria. For example, our max allowable loss limit is reached or our commit criteria is no longer valid.
  • If the stock should gap up beyond our loss point due to earnings, we will exit the trade.
  • Max risk: Maximum risk per spread is $500 (or $5.00 per share)
  • Max reward: Maximum reward is a minimum of $5.00 per share at expiration.
  • Break evens: $160 for upward movement. There is no loss point to the down side.

Exit Plan: This is where we bail out.
  • I will hold this trade (if filled) going into expiration.
  • If, going into expiration week, the stock is between $150 to $160, we will hold as this is our target range.
  • If the trade becomes worth $1.00 credit per share or more, we will exit.

Firing Line: You can see a demonstration of the trade here: FSLR Trade Plan . If you don't take your trading as serious as I do then you're going to get killed. Market makers, professional traders, and Wall Street firms love people like you. It's free money for them. If you don't mind donating your hard earned money to their bonus pools, keep doing what you're doing. If not, time to take control and even up the odds.
Matthew "Whiz" Buckley is the chief strategy officer of Options University, a provider of options education for options traders of all levels. . He is also the founder of Strike Fighter Financial, a business-consulting firm specializing in leadership development, risk management and strategic planning for Fortune 500 companies and related organizations. Buckley flew the F-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings and flew 44 combat sorties over Iraq. After leaving active duty, he worked as managing director of strategy at a Wall Street firm and CEO of a financial media company. He is an internationally recognized speaker and combined his experiences in the military and corporate America in his book "From Sea Level to C Level."