Trading Rules: The Key to Protecting Capital

We are in the game of protecting capital. Trading defensively. This is why I love diagonal spreads.

Here is the definition of diagonals:
Diagonal Spread
Any spread in which the purchased options have a longer maturity than do the written options as well as having different striking prices. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.

Diagonal Spread Income:

When not called out, there is 1 stream of income coming from the credit on the short leg you sell.
When called out, there are 2 streams of income:
1) the difference between the 2 strikes
2) the credit you bring in on the short leg

DIAGONAL TRADING RULES:
1. Do not trade until after 2pm, unless it is an emergency adjustment that still fits with all my trading rules. Remember, the first hour is "amateur hour," then the last 2 hours are for the pros. This is when institutional money, hedge funds, etc. sweep in and "clean house."
2. Size each trade within 5% of total portfolio size (this 5% is calculated from your max loss which is the same as your stop loss)
3. Buy 3 strikes in the money (ITM) and 3-4 months out into the future. Sell at-the-money (ATM) or out-of-the-money (OTM), depending on which one has the higher premium and extrinsic value you can sell.
4. If the stock's trend is moving against you, exit the trade. If the

The following rules for diagonal spreads are from www.insanemoney.com. I have been following these rules in addition.
1) Always have a stop loss on your long position no greater that 20% of the underlying cost basis. 10% per Jesse Livermore.
2) Look for trades that are in between strike prices .
3) Make sure the delta on your long strike is at least .80.
4) Look for a 5% return in the front month or better.
5) Make sure you have a good bullish trend.
6) Buy long call 2 to 3 months out and 3 to 4 strikes ITM.
7) Sell the call to cover that has the most time value in the front month and will still be profitable. This will give the best downside protection.
8) If you want to hold a long call DITM for some straight line appreciation then put a 10% stop loss on it.
9) Make sure that you don’t make up more than 5% of the total open interest on a option. Especially the long, DITM option.
10) Buy back your short option once 70% of its time premium has decayed. Look to roll out to a new month if its time decay vs. underlying movement of the stock. If it is stock price (like a sudden decline) buy back the call and place a stop loss on your long position.
11) Buy back your short option once the delta of the short reaches .25 or less. At that point your short option is only covering 25% of your potential loss to the downside. Sell another ATM short option for protection.
12) If all other things are the same and you can’t decide which strike to sell, sell the OTM strike for the most profit and the ITM strike for the most adverse protection.