Trade Parameters

Last modified 00:01, 6 Oct 2012

Trade Scan Strategy Parameters

Use the Tade Parameters tabbed page to define trade strategies that you want to scan for.

When Scan for Trades is selected in the function bar, the scan will be performed in conjunction with the settings for individual options made in the Option Leg Filters tabbed page. Trades which meet the criteria set on both pages will be returned.

When Scan for Options is selected, the Trade Parameters tabbed page is no longer visible, this is because the trade definitions are no longer relevant to searches for individual options meeting only the Filters criteria. Refer to the Option Leg Filters topic for more information.

The Trade Scan Trade Parameters tabbed page is divided into six sections:

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Click on any of the listed items in the graphic above to go to its help topic below.

General

The General settings set the stage for the overall scan including what price to use in the calculations, how many results to return, how to rank the results and the date at which the scan would be performed.

tradscan_params_general.gif

Entry price for options

For the legs of the strategy you can determine what execution price to use.

For example at the Natural Price (default) sold legs would be executed at the bid price and bought legs at the ask price. This typically generates the minimum profit for the strategy.

Alternatively you can choose the Last Price that each option traded at, the Mid Price point of the bid-ask spread, or the Model Price which you can specify in the Option Leg Filters tab.

Return top "X" Results, Ranked by

Enter how many option trade strategies will be returned for each scan, and how you want them ranked i.e. by Cost, Max Profit, Odds of being profitable, etc.

You can also rank them according to the Expected Profit/Risk where the predicted profit of the strategy is averaged and divided by the average of the predicted loss, or Max Profit/Risk where the max profit is divided by the max risk to provide a ratio on which the trades are ranked.

If Max Profit/Cost is selected the trades are ranked according to their profitability compared to the cost of entry.

Search Date

Enter the date you want the scan to include up to.

If the Use Current Data check-box is ticked all dates up to and including the current data held will be used.

Un-checking this box will activate this field and allow you to enter a specific date. The scan will be performed as of that date. This is useful for back testing your Trade Parameters settings.

Outlook

Settings in the Outlook section determine which strategy types will be available in the Strategy selection table below it:

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Market

Check the box that represents your outlook on  the market: Bullish, Bearish or Neutral

You can select more than one option if you wish.

Volatility

Check the box that represents your outlook on volatility for the underlying instrument you are scanning: High, Low or Neutral

This Outlook will determine the strategies that are displayed in the Strategy section, see next section.

You can select more than one option if you wish.

Strategy

The Strategy selection table is populated with strategies that have been developed specifically for the underlying market conditions indicated in the Outlook section's Market and Volatility settings above.

tradscan_params_strategies.gif

Check the box beside the Strategies you wish to include in the scan.

Selecting more than one strategy will identify the most suitable trade from all of the available combinations for all the strategies selected.

The Mkt and Vol columns mirror your Outlook settings for Market and Volatility.

The Money column defines whether the strategy requires options that are currently In-The-Money, At-The-Money or Out-Of-The-Money and the CR/DR column indicates whether the strategy will have a net cost (Debit) or provide income (credit) to you.

Strikes

The Strikes section allows you to specify the price range of the strike prices included in the scan results.

It lets you remove option combinations that are far from the current stock price (deep Out-of-The-Money), or that have a wide difference between the strike prices of the strategy.

tradscan_params_strikes.gif

Percentage from Close

The first two criteria allow you to specify the distance of the primary strike price for each strategy from the underlying stock's closing price.

The parameter is expressed as a percentage.

The Primary strike is the lowest priced option in the strategy and the setting will be triggered by that leg's strike price.

For example, for results including only options that have primary strike prices not more than 5% above the stock's last closing price, check the box beside Primary strike up from close and enter the value 5.

You can set percentages up and down from the strike price.

Strike Price Increments

Similarly you can specify the Minimum or Maximum strike price increments.

Strike Price Increments are the price range between two legs of a strategy.

The parameter is expressed as a dollar value and is only effective for multi-legged strategies.

For example, you can choose to include options that have a Minimum strike increment of $5.00 between strike prices and a Maximum strike increment of $15.00 between strike prices. This would eliminate all strategies from the results which had a price differential between two legs of less than $5.00 as well as those strategies containing two legs with a price differential of more than $15.00.

All legs are scanned, not just the primary leg.

It should be noted that stocks with a current price below $25 will have an increment as low as $2.50 while those above $25 will have $5 strike price increments.

Trade

The criteria options within the Trade section allow you to specify parameters for the entire trade based on price movements.

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Delta

Measures an option's sensitivity to changes in the price of the underlying stock.

It is often thought of as the probability of the option expiring ITM. The entry can be less than, equal to or greater than a given value and specifies the Delta for the entire strategy. It is especially important for the call buyer as it will tell how much of an increase or decrease can be expected for short term moves by the underlying stock. The value you enter depends on the strategy you wish to employ.

Gamma

Gamma measures an option Delta's sensitivity to changes in the price of the underlying stock. It is merely a precise measurement of how fast the Delta is increasing expressed as a percentage.

The entry can be less than, equal to or greater than a given value and specifies the Gamma for the entire strategy. Deeply OTM of ITM options have gammas close to zero because the Deltas will hardly move at all for a significant change in the underlying stock. Likewise gamma increases as an option moves from OTM to ITM or vice versa.

Maximum Risk

Specify the max cost and max risk of the total strategy, all trades having a higher risk will be eliminated from the scan results. This is useful when implementing money management rules and/or if you are risk averse.

Buy IV is less than Sell IV

This allows you to specify the value by which the Buy Implied Volatility is below the Sell Implied Volatility.

For example, if you enter a value of 5, the scan will only include any option combinations where the Implied Volatility of the bought leg is at least 5% lower than that of the sold leg. For spread strategies, as the price of options is directly influenced by IV, this allows you to focus on buying cheaper options (lower volatility) and selling more expensive (higher volatility) options.

% to Double

The Percentage to Double column displays the percentage the price must move in order to recover the initial cost, plus make the same amount in profit. For example, if the cost of the strategy is -$60, the Percentage to Double column would display the percentage increase necessary to return the outlay to credit, then increase the profit by 100%, taking the amount to $60.

Calendar Spread

These criteria only apply if you have included calendar spread strategies in your scan.

Calendar spreads involve options with different expiry months whereby you buy the long-dated option and sell the nearer-dated option to finance the purchase.

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Number of Days between Legs

You can specify the minimum and maximum number of days between the legs.

Percentage IV difference between Legs

You can also specify the percentage by which the implied volatility (IV) of the near leg is higher or lower than the implied volatility (IV) of the far leg.

This is useful, for example, when you want to sell options with higher IVs (more expensive) and buy those with lower IVs (cheaper).

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