Safeguards and Limits

The Option Alpha autotrading platform has safeguards and limits to protect traders. Here is what you need to know to confidently implement your trading strategy.

The Option Alpha autotrading platform has been designed with multiple safeguards and limits in place to protect traders.

  • Bots do not perform actions until you turn them on.
  • Bots require that you define what to do, when to do it, and with how much capital to allocate.
  • Bots necessitate you to think through the entire trading process from entry to exit. This is for your safety.

Bot safeguards are designed to help traders think about their automations critically. Position limits help manage overall portfolio allocation and automations are automatically turned off if a limit triggers. The bot will alert you if an automation is missing an input so that you do not create an automation without clearly defining the actions the bot should perform.

You can always paper trade with any bot and test automations in live market conditions.

Allocation safeguards

When you create a new bot you must manually input allocation and position limits. Allocation is the total capital from your trading account that is available for a bot to open positions. Bot allocation limits are calculated at position entry.

Market conditions at position closing may cause increased capital allocations beyond the calculated maximum risk at position entry. If the market is illiquid or bid-ask spreads are wide, bots have the potential to risk more capital when the position is closed than was allocated at entry.

For example, if there is a wide bid-ask spread for a credit spread position, the ask price to close the spread may exceed the spread’s width. As always, you have the ability to manually override positions, SmartPricing settings, exit criteria, and orders at any time.

If you manually override a position, the Option Alpha platform no longer communicates with the position, and the position will not count against position limits or capital allocation limits. You may need to re-consider your bot’s capital allocation limit if you manually override positions.

The bot will not open a new position once the allocation limit is reached. If the allocation limit is reached, a new position will only open once another position has been closed and additional capital becomes available or you change the bot's settings.

Position safeguards

You must manually select daily and total position limits from the dropdown menu before a bot is created. Bots allow for ten daily positions and ten total open positions.

The daily limit is the maximum number of positions a bot can open in one trading day.

The total limit is the maximum number of positions that can be open in a bot at any time.

Position limits are for opening positions only; you can close as many positions as you want.

Scanners are automatically turned off if a bot reaches either limit. If a bot has reached an allocation or position limit, the scanner turns off and an error is displayed in the Position statement and Bot Log stating that a position limit has been reached.

Trade safeguards

Trade safeguards require you to manually input certain values, such as the ticker symbol, expiration date, strike price, and more. You must also quantify maximum risk, contract amount, or a percentage of the bot's allocation.

These protections are in place because you are responsible for telling the bot exactly what to do.

Screenshot highlighting trade safeguards in the automation editor

Other safeguards

Bots may open risk-defined options positions. This feature is in place to protect traders from undefined risk and to control margin requirements.

Synthetic naked positions can be replicated by purchasing far out-of-the-money long options to create a wide credit spread.

Was this helpful?

FAQs

Can I enter positions with undefined risk, such as strangles, straddles, naked short puts, and naked short calls?

No, at this time only risk-defined strategies are allowed.

Will I be required to have certain levels of options clearance with my broker to use the platform?

Yes. Every broker is different, but to execute options orders in your broker platform, you will need the appropriate options approval level to make certain trade types so plan accordingly with your broker.

What happens if my bot attempts to open a position and I do not have enough capital available in my brokerage account?

Bots monitor your account’s buying power and if your bot tries to open a position that exceeds the bot’s allocation limit or exceeds your account’s buying power, the bot will display an error notifying you. You can view error messages in the bot log.

What if the bot platform goes down and an order is not sent or filled?

The bot platform has extensive backups and redundancies and should not go down. However, if it did, it would continue its scheduled intervals when it came back.

Can bots be set up to keep me from breaking Pattern Day Trading rules?

Yes, you can use a decision recipe to limit how many positions the bot will open per day.

Can I interfere with automations and enter or exit positions out of sequence?

Yes, you can manually open and close positions in a bot.

Can I set my own default value for allocation and position limits for every bot?

Yes, each bot has global settings specific to the bot. Every bot can have different allocation and position limits.

Why do I have to set the capital allocation and position limits for each new bot?

As a safeguard, we require each trader to set their own limits for a bot when it is created. You can edit the settings at any time.

What happens if the bot attempts to enter a new position but no longer has capital to allocate?

The bot will produce an error message that will show up in your log.

If a bot has hit a capital or position limit and I increase those limits how quickly will the bot start using the new limits?

If settings are changed, the bot will use the new allocations on the next scheduled interval.

How do I give the bot more capital to trade or more positions to enter?

You can modify a bot’s settings at any time. Select the gear icon in the top right corner and choose “Settings.”

Why are bots limited to a certain number of open positions at one time?

Bots are limited by design to only allow a certain number of positions as a safeguard to prevent you from accidentally creating a bot that opens more positions than your account can handle.

Can a bot open a short stock position?

Yes, a bot can open a short stock position.

Can a bot open a naked options position?

No, at this time only risk-defined strategies are allowed.

Do bots know when there are market holidays, early closes, and emergency closes?

Bots are aware of preset market holidays and early closes, but they would not be aware of emergency market closes.

Related articles