We’ve had some great Community discussions about how to combat abnormal price fluctuations, specifically erratic wide bid/ask spreads. The goal is to let you filter market prices for more consistency.
The new SmartPricing final price setting gives you more control and provides increased functionality so you can define how much slippage you’ll allow relative to the position’s mid-price.
Mid-price controls to avoid slippage
Set your maximum slippage as a Final Price in an Open Position action before entering any trade. This ensures the final limit order used by SmartPricing will not be more than your defined value from the position’s mid-price.
For example, a short put spread has a wide bid/ask spread:
- Current Bid: $0.20
- Current Ask: $1.10
- Mid Price: $0.65
Assume you open the position for a $0.90 credit. Even though the current mid-price shows a profit of $0.25 ($0.90 - $0.65), if an order is filled at the ask, what looked like a winner would become a loss of -$0.20 ($0.90 - $1.10). With the new guard, you could set the max slippage.
Sudden periods of volatility can occur in even the most liquid ticker symbols, causing an option contract’s premium to increase temporarily. When the bot evaluates a position’s returns, it uses the mid-price to check for a profit target.
However, when the bid/ask spread widens, it may cause SmartPricing to go far beyond the mid-price, turning what looked like a winner into a loss.
Now, you have the power to customize how far SmartPricing will go beyond the mid-price to control slippage. So, no matter how wide the bid/ask spread gets, SmartPricing will always stay within your defined range from the mid-price when checking for a profit target or stop loss.
Sometimes pricing is volatile and bid/ask spreads widen. The new bid/ask guard lets you ignore these situations until pricing becomes more rational.
You can automatically disable Exit Options in an open position action if the bid/ask spread exceeds your defined value. If the bid/ask spread is larger than your acceptable price, Exit Options won’t send an order. It also won’t record the position’s high or low.
For example, if the Bid/Ask Guard is $0.20, and the spread is $0.08, the position’s bid/ask spread is lower than the guard’s value. Exit Options will continue to run, and the position's high % and low % are tracked.
If the Bid/Ask Guard is $0.20 and the spread is $1.23, the bid/ask spread exceeds the maximum allowable value. Exit Options will be temporarily disabled and the position's returns will not be tracked until the bid/ask spread comes back inside your target range.
Don't miss this in-depth workshop on trailing stops and bid-ask guards.
Additional closing position Best Practices
In addition to the new SmartPricing settings and Bid-Ask guards, there are multiple filters you can use when closing positions. Many of the common position closing issues can be avoided by planning ahead and using the tools provided in Option Alpha. Here are the most common issues and simple solutions to avoid them when autotrading.
The slippage control feature is available in Close Position actions as well. Similar to using this protection in an Open Position action, this guard lets you control how far from the mid-price an order can be filled.
Two key 'Position' recipes inside a monitor automation enable you to evaluate option pricing. Check the position’s bid/ask spread directly before a Close Position action to make sure the spread is not too wide. A wide spread can trigger a ‘false’ return during pricing anomalies (i.e. highly volatile events like FOMC days).
You can also check a position’s individual legs for specific values. Use this recipe to compare position leg properties to ensure there is not a $0 bid, which is common in out-of-the-money legs near expiry, which can make it difficult to close the long leg of a spread.
Leverage Final Price settings
An often underutilized feature is the Final Price setting in SmartPricing. The Final Price is the last price in the SmartPricing order sequence. It is the minimum price when executing a sell order.
For example, if you have a profit target of 50% on a credit spread, you can set the Final Price to X $0.50 the original entry price and the bot will not send an order for less than a 50% profit.
Exiting a position can be made easier by setting yourself up for success when you open the position. Utilize position criteria in Open Position actions to set a minimum bid-ask spread so you don’t enter a trade with a wide spread that could impact profitability when closing the position.
It’s no secret that 0DTE positions have become increasingly popular with options traders. Automation makes it easier to open and manage same-day positions. There are some unique challenges that can occur with 0DTE contracts that autotraders should keep in mind.
Splitting multi-leg positions
Consider breaking your 4-legged positions into two credit spreads. This makes it much easier to exit one side of the trade if two of the legs are far out-of-the-money and have low volume, especially for short-term expirations.
Override & manual position management
Far OTM options can be difficult to close near the end of expiration day. You can overcome this challenge by overriding a position and managing the legs individually in your broker. Learn how to override and manage positions.