New Exit Option for ITM Price "Touches"

The October 2024 release includes a new Exit Option for in-the-money (ITM) price 'touches.' Not only can we use ‘Touch’ to monitor positions, we can also include it as an exit option in the new backtester.

The new 'Touch' Exit Option references the underlying price relative to a position's strike price(s). We can use 'Touch' to trigger a closing order if the underlying price is '$X' or 'X%' from in-the-money (ITM) or less.

For example, we can close an iron condor if the underlying price moves above the short call leg or below the short put leg by using a 'Touch' value of $0 to exit the challenged position. An order will be sent to close the trade once the position goes in-the-money.

Backtesting the ‘Touch’ Exit Option gives us a whole new way to view a strategy’s performance with an extra layer of custom trade management. Here’s a look at comparing a next day SPX iron butterfly with and without the ‘Touch’ Exit Option included. 

Testing the two variations highlights how modifying backtest settings can impact performance. It’s interesting to note that while the backtest without ‘Touch’ management performed slightly better, it was more volatile than exiting deep in-the-money trades, considerations traders may want to factor it when evaluating different strategy variables.

Plus, we can generate a bot from any backtest, and the identical Exit Option settings will flow through to the bot automatically.

There are a handful of ways to use the new 'Touch' Exit Option to manage positions, including:

1. Exiting a trade before the underlying price moves past the short leg. For example, If a short put spread has a 'Touch' value of $1.00, a closing order is triggered if the underlying price is $1 or less above the short put leg.
2. We can use a negative value if we want to allow the position to go ITM before exiting. For example, if a short call spread has a 'Touch' value of -$.50, a closing order is triggered if the underlying price moves in-the-money above the short call leg by $0.50 or more.
3. Another use case is to exit the position if the underlying price moves past the long leg of a credit spread. For example, if we have a $10 wide iron butterfly, we could set the Touch to -$10 and close the trade if either long leg is breached.
4. The 'Touch' setting can even be used for long options and debit spreads. The touch value always refers to a position going in-the-money. For example, a long call spread is ITM if the underlying price is above the long call leg. We could use a negative touch value of -$.01 to exit the position once the underlying is above the long call.
5. Using a % setting for Touch references how ITM or OTM the position is relative to the underlying's stock price. For example, an iron condor with a 100P could use a -5% Touch setting to exit the trade if the underlying price drops below $95 (5% ITM).

These are just a few examples of how we can leverage the new ‘Touch’ Exit Option inside our bots. We can’t wait to see how traders use this new functionality in your positions and when comparing backtests.