Reference · Look-ups · Chapter R4

Checklists

The one-page tools

These are the book's decision tools, each short enough to keep open while you trade. Each names the chapter that explains it. A checklist is only as good as your understanding of why each line is on it, so read the chapter before you rely on the list.

1 · Four sources, five categories

Every edge comes from one of four sources (Chapter 1G) and belongs to one of five categories (Chapter 10A). The source says why an edge pays. The category says how to size it and when to kill it. This grid places the book's edges on both.

2 · The five-question stress test

Answer these before you allocate to any strategy, and above all to one that sells volatility (Chapter 1D):

1. What is my tail loss? Specifically, the $\text{ES}_{95}$: the average loss in the worst 5% of months.
2. How does margin expand under stress? Run the position through S2 (SPX down 20%, the VIX up 25 points).
3. Can I hold to expiry? If the position marks to a loss of $X$% in 30 days, would I be forced to close it?
4. Is the premium adequate compensation for the skew? Apply the 30% to 50% Sharpe haircut.
5. What is my kill criterion? It must be specific, measurable and committed to in advance.

If you cannot answer all five, the position is too big or you do not understand it well enough.

3 · The four scenarios

Test every portfolio, and every sleeve in it, against four scenarios (Chapter 1D and Chapter 13G):

• S1: SPX down 10%, the VIX up 10 points.
• S2: SPX down 20%, the VIX up 25 points.
• S3: SPX down 35%, the VIX up 50 points.
• S4: a 1987-style overnight gap.

A sleeve must stay operational in S2 and recoverable in S3. If it does not, make it smaller.

4 · The trade admission checklist

A trade earns capital only when every one of these 13 boxes is ticked (Chapter 13B):

1. The source is identified: one of the four.
2. The category is assigned: one of the five.
3. The evidence tier (T1, T2 or T3) is set, with its primary source cited.
4. The mechanism is stated: why does this work?
5. The academic Sharpe ratio is documented.
6. The retail haircut is applied, giving a realistic Sharpe ratio for your account.
7. The regime is checked: does the current state support the trade?
8. The tail loss is calculated: $\text{ES}_{95}$, and the loss in S2 and S3.
9. Margin behavior under stress is known.
10. The position size is survivable in S2 and recoverable in S3.
11. Kill criteria are specified, measurable and committed to in advance.
12. The trade's correlation to the rest of the book in stress is known.
13. The conviction score is at least 0.5: $C \ge 0.5$.

5 · More tools in the chapters

Other chapters close with tools of their own. Each is explained where it appears:

• Four questions before any trade and the morning routine of the market dashboard: Chapter 11A.
• The five rules of options execution and the execution journal: Chapter 2D.
• Reading a gamma exposure map: the seven-step session workflow and the checklist to run before any trade the map touches, with how to test a level against its base rate: Chapter 8J.
• The three preconditions of a gamma squeeze, as a checklist: Chapter 8I.
• The composite scorecard: Chapter 11G.
• Ten ways a swing trade fails, at a glance: Chapter 11N.
• From a market view to a structure, a cross-index of strategies: Chapter 12F.
• The pipeline from signal to trade, in five steps, with the behavioral state checklist: Chapter 13C.
• Kill rules at three levels, for a trade, a sleeve and the portfolio: Chapter 13C and Chapter 13G.
• The setup cards: swing setups, risk overlays, allocatable strategies, filters and do-not-trade cards, in Chapter 13F.
• The trade journal: Chapter 13H.

6 · The framework in one paragraph

No edge in this book is permanent. The literature keeps changing: some of the edges here decay, and some ideas the book now rejects are later validated again. The framework is more durable than any single edge: sources, categories, the conviction score, the haircut, kill criteria and a monitoring cadence. The Edge Book puts the whole of it in one instruction:

The Edge Book adds that doing this consistently filters out 80% of retail trading content as low-conviction or rejected. The remaining 20% is then sized to anchor a portfolio that lasts decades.