Construct Strategies

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Strategies

To create a new analysis, click on the Options icon and select New Analysis from the menu. Type in the code for the underlying security and press Enter. This will load all of the options for that security, separated into puts and calls and displayed by strike price and expiry date.

You can reduce the number of options displayed through the options Filter, accessed by selecting a filter from the filters drop-down menu on the Function Bar. For further details, go to the Option Filters topic.

Build a Strategy

Strategies are based on one or more contracts. The individual contracts for strategies with multiple contracts are referred to as legs of the strategy.

Quick Entry

To create the first leg, select an option to be included in the strategy from the Calls or Puts table and press the Plus (+) or Minus (-) key on the keyboard. If you have the Contracts icon appearing in the current view, bought options appear with a plus sign while sold contracts have a minus sign. Each press of the key increases the number of contracts. For example, to buy four calls you would press the Plus key four times.

Note - Use the Control or Shift key in combination with the Plus (+) or Minus (-) key to extend this shortcut. Hold down the Control key to increase the multiple to +/- 10 contracts and the Shift key to multiples of +/- 100.

By default, the option type will be set to a Buy to Enter setting with the option’s Ask quote set in the Price field and the option's Last Traded Date inserted into the Date field of the contract. All fields can then be manually modified according to the particular trade details.

The Strategy Summary section of the work-page shows the details of each transaction that is included in the strategy. This also shows the cost of the strategy.

Enter Transaction Dialog

Alternatively, double click on the option to open the Enter Transaction dialog box.

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The option code and the exchange fields are filled in automatically with the option you double-clicked on.

From the Type field, choose whether you want to buy or sell the selected option. The date of the option expiry is automatically entered in the Date field, however you can change this if you wish.

Enter the number of contracts that you wish to trade in the Contracts field. The Multiplier field will then change according to the number of contracts entered. The Multiplier field represents the equivalent number of the underlying security being bought or sold per contract and is determined by the particular security. This can change according to whether an Equity or Index is being traded. For example in the US options market, 1 contract controls 100 underlying shares. This would give the Multiplier a value of 100. If the XJO (ASX 200) contract was traded, then 1 contract controls 10 of the underlying instrument.

If you are trading shares, enter the number of shares you want to trade in the Quantity field. (The Multiplier field will change to Quantity when shares are being entered). The Contracts field is disabled for share purchases.

The Entry/Exit field shows whether this trade is designed as an entry strategy, or an exit strategy.

The price of the instrument is automatically entered into the Price field, which you can change. By default, if you are Buying an option, the price field will default to the Ask quote. Likewise, if you are Selling an option, the price field will default to the Bid quote. The Price field can be manually changed at any time for shaving the option’s spread.

If you are selling options, you can also complete the Margin fields, either by entering a percentage or an actual amount.

Transaction Details

Click on the Details>> button to add or view additional information of the transaction:

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Select the broker from the Broker drop down, and click on the ellipse next to the Brokerage field to display the Brokerage dialog box. Here you can enter the Commission, Fees and either the actual GST or have Your SOFTWARE calculate the GST for you.

When you click on OK, the brokerage total is displayed in the Enter Transaction window.

If you wish to record the reason for entering or exiting the trade, record this in the Reason field - this will allow you to look back at your trades and benefit from your experiences.

Finally, you can choose whether it is a filled or unfilled order. A filled order means it has been confirmed by your broker, an unfilled order means that you have placed the order and are awaiting confirmation.

Symbol Information

This system supplied information provides up-to-date market data.

The user can alter the point size, click on the text box button to open the Point Information dialog box.

Allocate To

This section is grayed out during the analysis process and available only when working with portfolios.

Edit a Leg

The default price and date may need to be edited or the current leg may later be closed out by an offset transaction canceling the open position. See the section Close A Leg.

If there is only one transaction associated with the option, double click on the option in the table to open the Edit Transaction dialog box, it has the same contents as the Enter Transaction dialog, except the option's symbol can no longer be changed.

If there are a number of transactions made for the same option series, the individual transaction to be edited must be selected.

Position the cursor above the option in the table and right mouse click.

The transaction pop-up menu will display.

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Select Adjust to open the Adjust Transactions dialog box.

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Select the transaction to be edited and click Edit.

The Edit Transaction dialog box will open.

Other Pop-up Commands

The Add To Strategy command will also open the Edit Transaction dialog box.

Delete Transactions

Move the cursor above an option, right mouse click to open the pop-up menu and click Clear to delete the transaction.

If there are more than one transaction associated with that option, the Edit Transaction dialog box will open.

Select a transaction and select Delete to remove it from the strategy.

Price Data, displays the Price Data window for the symbol.

Option Graphs opens an Option Graph for the symbol.

Information opens the Detailed Symbol Information dialog box for the symbol.

Synchronize Scrolling, links the Call and Put tables when they are displayed together. For more information, go to the Option Chain Display topic.

Configure View opens the Custom Views dialog box for the symbol.

Close a Leg

Use the Close To Exit pop-up command to offset and close out an open position. Note this command will only be enabled when there are open option legs on the data table, otherwise it is grayed out on the pop-up menu.

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Select the open leg from the option data table and right mouse click to show the pop-up menu. Click Close To Exit which will open the Enter Transaction dialog.

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The Enter Transaction dialog will automatically be populated with the details to close out the trade. The Entry/Exit field will be set to Exit and grayed out. The Contracts field will default to the total number of contracts traded. The Price field will default to the Bid quote if a Sell trade is invoked or the Ask quote if a Buy trade is required.

Both the Contracts and Price fields can be edited. For example, there may be times when only a portion of the total number of contracts will be closed out and the remaining contracts closed out at a later date. In addition, the price field can be modified to shave the bid/ask spread.

Click on the Ok button and the software will automatically close out the number of contracts entered in the trade and at the specified price. A new Exit Transaction will be added to the Strategy Summary table. If all contracts in a trade are closed out, the net position will be zero and the net profit/loss figures are shown.

 

Adding Stock to a Strategy

Users wishing to construct certain strategies such as Covered Calls or Collars may add underlying stock to their strategy by using the Asset section of the Analysis Work Page:

Underlying symbol.jpg

To enter a transaction, click in the Asset work area and utilise the quick entry function by pressing the Plus (+) or Minus (-) key on the keyboard.  Each press of the key increases the quantity to be added. For example, to buy four stocks you would press the Plus key four times.

Note - Use the Control or Shift key in combination with the Plus (+) or Minus (-) key to extend this shortcut. Hold down the Control key to increase the multiple to +/- 10 contracts and the Shift key to multiples of +/- 100.

You may also right click within the Asset work area and select the Add to Strategy option

Right click.jpg

The Edit Transaction Window should then pop-up and allow you to edit any details of the transaction.

Buy or Sell Using an OptionsXpress Account

Users who have an OptionsXPress trading account can send through analysed trades or strategies directly to the broker platform for trade execution. This is a powerful feature that gives users a seamless integration between the analysis screen and placing trades directly into the market.

Note: Your OptionsXPress account must be setup in order for the Buy and Sell features to work. See the section OptionsXPress Brokerage Configuration.

Single Leg Trades

Single leg option trades consist of either a Call or Put option. These are the simplest types of option strategies and can be traded through the software. For example, a simple trade may consist of Buying 3 At-The-Money Call options.

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Selecting the active options and right mouse clicking enables the pop-up menu. Then selecting the Buy command will open an Order Entry ticket that is directly linked to the OptionsXPress trading account.

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An Order Entry ticket is opened in the Options tab consisting of the Call options and number of Contracts that were in the Options Analysis screen. For option trades, the Order Type defaults to Market and the Market $ defaults to the Ask price of the option. In the example above, the default price is set to $37.90. The Expiry defaults to Day Order.

When trading in the options market, it is typical to enter orders using the Limit order type. A simple Buy trade is usually executed at a Net Debit and the price set from the Options Analysis of the strategy can be used as an entry price. The example below shows an optimal entry debit price of $37.70 which was the result of an Options Analysis after some price shaving was performed.

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To enter this value in the order ticket, change the Order Type to Limit and set the Limit $ to $37.70. The Expiry is set to Day Order which means the order will only be active for the next trading session. Check the All or None box. This means the order will only get executed if all the contracts specified can be filled. In the example, 3 Contracts must be executed in order to get the trade filled.

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Then click on the Submit button to send the trade to the OptionsXPress trading platform. If the trade was sent successfully, a message will be returned informing that the order was accepted by OptionsXPress and a receipt number will be issued. If the trade was unsuccessful, an error message will be returned explaining the reason why the trade failed to get sent to the OptionsXPress trading platform.

Users can double check that orders were sent correctly by opening the Broker Account View within Your SOFTWARE and selecting the specific options trading account to see the order status. Alternatively, users can log into their OptionsXPress web trading account and checking the Order Status page to see if the trade exists.

Multi Leg Trades or Strategies

The software allows the user to enter any type of multi legged option trade. These can comprise of multiple option legs that form a type of trading strategy. For example, an options analysis may be performed on a “Butterfly” type trade which could consist of selling 2 At-The-Money Call options and Buying 1 In-The-Money Call option and Buying 1 Out-Of-The-Money Call option.

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By selecting one of the active options and right mouse clicking to enable the pop-up menu and selecting the Buy command, the software can enter this entire strategy as one order ticket directly to a linked OptionsXPress trading account.

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An Order Entry ticket is opened in the Strategies tab consisting of all the Trade Legs and number of Contracts that were in the Options Analysis screen. For multi legged strategies, the Order Type defaults to Market and the Market $ defaults to the Ask price of the first option leg in the strategy. In the example above, the default price is set to $48.45. The Expiry defaults to Day Order.

It is typical to enter orders using the Limit order type when trading multi legged options. A standard Butterfly trade is usually executed at a Net Debit and the price set from the Options Analysis of the strategy can be used as an entry price. The example below shows an optimal entry debit price of $2.45 which was the result of an Options Analysis after some price shaving was performed.

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To enter this value in the order ticket, change the Order Type to Limit/Debit and set the Limit/Debit $ to $2.45. For option strategies that are entered at a Net Credit, use the Limit/Credit order type instead.

optanlys_buttrflylimit.png

Then click on the Submit button to send the trade to the OptionsXPress trading platform. If the trade was sent successfully, a message will be returned informing that the order was accepted by OptionsXPress and a receipt number will issued as shown below.

optanlys_buttrflycomplt.png

To double check that the order was sent correctly, users can open the Broker Account View screen or log into their OptionsXPress web trading account and check the Order Status page to see if the trade exists.

Transactions Table

All of the legs created for the strategy are listed in the transactions table in the lower half of the strategy's work-page.

The overall performance of the strategy can be seen in the Totals column.

Edit Transactions from Table

Click on the Adjust icon icon_adjust.gif at the beginning of each transaction's row to open its Edit Transaction dialog box.

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Action Menu Commands

The following commands on the Action Menu affect all the transactions on the Strategy's transactions table.

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Model

Select the Pricing and Volatility models to be used to calculate the value of the options. See section Option Model for more information.

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Clear All

To delete all current transactions from the strategy, open the Action menu and select the Clear all button.

All transactions on the current strategy work-page will be deleted.

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Back Test

Back Testing allows users to see how the strategy performed at different times during its life-cycle.

Select Back Test from the Action menu and a date selector will be added to the function bar:

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Drop-down the calendar selection tool to select a date for the test data.

Alternatively, step back from the current date or a selected date using the step buttons. The test will step forward or backward one trading interval at a time.

As each step is populated with data, the performance will be recalculated and totals displayed at the bottom of the table.

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Record as Paper Trade

The Records as Paper Trade command provides a simple method of adding all the transactions in the strategy into the Portfolio. This eliminates the task of re-entering the details of the transactions in both locations.

Click the command to open the Record as Paper Trade Wizard.

The Wizard will ask which Portfolio the transactions are to be opened in.

The Wizard can also open the Portfolio at the end of the process, or just save the transactions to the Portfolio and not view them.

Edit Option Volatilities

The ability to edit and model Volatility changes to Options is an important part of understanding how to select and trade these instruments. Changes in volatility can dramatically affect the price of an option and a thorough understanding of the dynamics involved should be studied before a position is taken in the market.

The software supports two methods to edit the Volatility values for options:

  1. Volatility for Individual Option Legs,
  2. Volatility for an entire Series of Options.

Edit Volatility of Each Leg

The Volatility value for each leg is based, by default, on the Price Model settings.

Users can manually alter the Volatility values for individual legs of the strategy, these changes will only affect the individual leg.

To change the value, move the cursor over the current volatility value and begin typing and click Enter when finished.

Enter Manual Volatility Clear Manual Entry
opanlys_manualentry.gif opanlys_manualclear.gif

The Manual Entry value will be in bold font.

The change in volatility will affect the individual leg where it appears in all the tables in the Strategies tabbed pages.

Return to System Volatility

To return to the volatility value generated by the Price Model settings, position the cursor over the Manual Entry and right click. A small pop-up menu containing one command will appear. Click the Clear command to return to the system value. The system volatility value will now display in regular font.

Edit Volatility of an Option Series

There may be times when a user wishes to substitute a system generated volatility with a manually created one. This could be required when testing the pricing and volatility theory of a new strategy or to simply correct a known data corruption. The software allows the user to override the system generated volatilities for an entire series of options.

To access this feature, goto the Action menu and select Manual Volatilities.

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For a full and thorough description on manually editing volatilities in the software, click the link Manual Volatilities.

Creating Additional Strategies

Up to six different strategies can be created in Your SOFTWARE's Analysis work page.

All of the strategies will relate to options for the same underlying security.

Create a New Strategy

Click on the New Strategies button butn_add.gif on the function bar to add a new strategy to the analysis.

A new options table will open, from which you can select new transactions to form the new strategy.

The user can name the tabs.

Right mouse click on a tab and choose Rename Strategy:

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A dialog box will open, type in the new name, and click OK.

Clone an Existing Strategy

An alternative to creating a new strategy from scratch is to clone an existing strategy:

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Click Clone Strategy to make a copy of the currently selected strategy. You can then rename it and make alterations to it. Using this feature you can quickly make different strategy positions that are similar to one another.

Delete a Strategy

When all six strategy tabs have been used, it is possible to delete one and create a new strategy in its place.

Select a tabbed strategy page and click the Remove Strategy button butn_delete.gif in the Strategies function bar to delete strategies, this will remove the entire tabbed page. Deletions will be required for new strategies when the six-strategy limit is reached.

The Action menu's Clear all command can also be used in an existing strategy to remove all its contents and create a new strategy.

View Strategy Graph

opanlys_graphfloatable.gifOnce the options strategy is complete, click on the Graphs tab to view and analyze the strategy you have created.

Each strategy will have its own risk graph.

The display of the strategies on the graph work page is controlled by the Analysis menu.

Select the Analysis display icon in the function bar to open the floating palette:

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Display Strategies

All the existing strategies will be listed in the upper part of the palette, and each will be assigned a color.

All can be plotted at once, or the display can be limited to one or more at a time.

Select the graph butn_prichart.gif button for the strategies to be displayed, and un-select those to be hidden.

For more information on the display commands in this floating palette, go to the Option Analysis Strategy Palette topic.

Display Profit Lines

There are five profit lines displayed for each strategy at regular intervals from the current date to the first expiry date of the strategy.

If only one strategy is selected, its days from expiry lines will be colored. If more than one strategy is displayed, all the profit lines will for each strategy will have profit lines of a decreasing shade of the color assigned to the strategy.

For more information on the lines and how users can over-ride the system defaults, refer to the Profit Lines and Time Analysis section of the Using Risk Graphs topic.

For more information on the Graph display in general, go to the Option Analysis - Graphs tabbed page topic.

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