Decision Recipes

Evaluating Opportunity Return Expectations

Evaluating opportunity return expectations allows you to evaluate a position’s rate of return probability. Here is how to use it.
Evaluating Opportunity Return Expectations
Steve Henry
May 24, 2021

The decision recipe for evaluating opportunity return expectations has three inputs:

  • Opportunity
  • Greater than/less than
  • Percentage

This decision recipe allows you to evaluate a position’s rate of return probability being greater than or less than a specific percentage to filter for opportunities when adding new positions.

Screenshot displaying the decision recipe for evaluating opportunity return expectations

The first field prompts a dropdown menu to choose a position type. The decision recipe will then prompt you to choose a ticker symbol and, if it is an options position, add the details of the options legs. 

Screenshot highlighting the various recipe input dropdown menus

The second field prompts a dropdown menu to select if the expected rate of return is greater than or less than the third field, where you manually input a percentage. When you have finished creating the recipe select, “Save.”

Screenshot highlighting the save button following the decision recipe inputs

NOTE: You can also create a custom input, which allows you to input the field later to make the decision recipe dynamic across all automations.

The decision will be added to the list of criteria. The recipe will pull in data from the opportunity’s details and determine if the possible expected rate of return is greater than or less than the percentage input.

You have the option to add more decisions to the recipe or return to the automation editor. When finished, select “Save” again to return to the automation editor.

Screenshot highlighting the save button to return to the automation editor

The automation editor will display your completed decision criteria for evaluating opportunity return expectations.

Screenshot highlighting the decision recipe within the automation editor

You can always select the decision inside the automation editor and make changes to the criteria.

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Comparing Opportunity Attributes
Comparing opportunity attributes allows you to reference a position’s attributes to make decisions. Here is how to use it.
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FAQs

How is the return expectation number calculated?

Please refer to the technical docs found here: Option Alpha Docs

Many options articles reference that you should try to get 1/3 the width of a spread as short spread premium, is this where I would use something like this?

Yes, you would simply ensure that the Rate of Return is higher than 33%

Is the calculation ONLY done upon looking for an entry or could this be used for exit purposes as well?

You would typically use this as an entry condition to ensure the trade qualifies or fits your risk to reward criteria.

Can a rate of return calculation be done on any options strategy?

Rate of return applies to defined risk strategies as naked options can theoretically have uncapped risk in some circumstances.

What things might cause the rate of return on a set width spread to increase or decrease?

The amount of credit received and the width of the spread are the two components used to determine Rate of Return.  

Can this calculation be done on stock or is it for options only?

Options only as stock does not have a rate of return.

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