How to Intelligently Use SmartStops

In this episode, I want to talk about a unique new feature we developed called SmartStops. SmartStops are unlike anything else offered in the trading world and only available in Option Alpha’s autotrading platform. 

What are SmartStops?

Have you ever wished there was an automated technology that tracked and trailed options positions with specific exit criteria so you didn’t need to watch and replace orders? And no, we’re not talking about outdated good-till-canceled orders or generic stop-loss orders. 

We created SmartStops because our beta users wanted a more intelligent way to trail position orders.

Traditional Trailing Stop-losses

With a traditional trailing stop-loss order, you can trail a position by a fixed dollar amount or percentage. As the position’s value increases, your stop-loss order moves up with the position. If the stock reverses, it will trigger the trailing stop.

How SmartStops Optimize Exiting Trades

SmartStops are not like normal trailing stops. 

SmartStops allow you to set a target and a trailing percentage for a position.

What's great about SmartStops is that you don't have to enter the order after opening a position, like you would with a brokerage platform. You can use SmartStops as another decision step inside an automation.

How to Use SmartStops

SmartStops are a decision criteria you can use inside monitor automations. Monitors reference information for an existing position. The decision recipe automatically connects to the position.

When you add decision actions to an automation, you can add the recipe “Position Trails Target % by Trailing %.”

You can set your target at any percentage you want. The target becomes the threshold, or hurdle, that must be triggered to initiate the trailing of the position.

Once you’ve set a target, SmartStops are intelligent enough to know the trade’s direction. 

For example, if you have a short trade with a 50% target, SmartStops knows to start trailing once the position’s premium decreases by 50%.

If you set the target at 50%, nothing happens until the 50% profit target is triggered. Once the position’s profit reaches the 50% target, the trailing begins.

You tell SmartStops what percentage to trail the position. The trailing order’s percentage is relative to the position’s premium, not the underlying ticker symbol.

For example, if SmartStops begins trailing at a 50% profit, you can set the trailing stop-loss order 10% below. It will trail the position by 10%, but not until the 50% profit is reached.

Examples

This example focuses on an SPY iron butterfly position. 

Notice the position has a 12% profit, meaning the position’s premium value has decreased by 12%.

The bot log shows that the position hasn’t reached the 50% target to trigger the trailing stop. The position’s highest profit at any point was 14.13%.

Therefore, the automation proceeded down the “No” path. The position wasn't trailing the 50% target by 10% because it never reached the 50% target.

In the second example, SmartStops uses the same 50% target with a 10% trail. The position has a 61% profit.

The position is above the 50% threshold. 

The highest unrealized profit for the position was 70.59%. The position was off its recent highs, but it only trailed the recent high by 9.8%, so the trailing stop did not trigger a close position action.

The monitor automation will continue to manage the position. The good news? A profit is secured, and there is potential for larger gains. This type of functionality was never available in the past.

The bot will trail the 50% target by 10%. An order to exit the position will not be sent to the broker until the premium is 10% below its highest level.

Remember, using SmartStops in this way does not guarantee your position will have a 50% profit. If the initial 50% target is met and the position reverses, it could be closed at 40%.

The key is to intelligently use automation to monitor and manage a position after it's reached your target.

Getting Creative With SmartStops

SmartStops are an incredibly powerful and dynamic tool. You can even use multiple combinations of SmartStops in a single automation. We have seen a lot of traders use SmartStops in conjunction with different days until expiration. 

For example, if a position is 30 days from expiration and reaches a 25% target, trail by 5%. If the position is 10 days from expiration and achieves a 50% target, trail by 2%. 

SmartStops enable you to be very creative with your position management because you're not limited to using one static closing order.

Using SmartStops with other recipes and decisions and actions inside of your automations gives you a lot of control, flexibility, and efficiency in your strategies.

Check out this Bot Template that uses SmartStops.

Don't miss this Bot Workshop where Kirk builds a bot with SmartStops (37:10).

Trader Q&A:

“Hi, Kirk. My name is Scott Erbanski. I've been trading for about three years now. I had a question about iron butterflies. I’ve seen that you sometimes take long stock if your short put is breached and then sell covered calls against it. Would you ever consider going short if your call is breached and sell covered puts? Thanks.”