
Start Here
Platform

Tour
Bots 101How it worksLive demo
Tools
Automated tradingOptions backtestingWatchlist scannerPrivate community
Use cases
New investorsStock tradersActive tradersPassive investorsSwing tradersAlgorithmic traders

Templates
By trade type
Stock trading botsOptions trading bots
By strategy type
Bullish options strategiesNeutral options strategiesBearish options strategiesHedging strategies
By style
Active and high frequency botsEvent-based botsTrend trading botsMomentum trading botsStatistic and probability-based botsTechnical analysis botsEarnings strategy bots

Integrations

Pricing
Education

Courses
Overview
By experience
Beginner
What is an options contract?Stock trading vs. options tradingOptions contract specificsCall vs. put options basicsBuying options vs. selling optionsOptions profit and loss diagramsOptions pricing tablesOption moneyness (ITM, OTM, and ATM)Options pricing and the "Greeks"Options expiration and assignmentWhat's our "edge" trading options?Single vs. multi-leg options strategiesSmall account options strategies
Intermediate
Fearless, confident options tradingHistorical volatility vs. implied volatilityPredicting market movesTrade size and capital reservesPortfolio balance and beta weightingHow to choose the best options strategyHow far out to place trades?Strike price anchoring with probabilitiesTips on getting your trades filledAdvanced and contingent orders7 step options trade entry checklist
Advanced
Developing a daily trading routineHow to avoid "Black Swan" eventsAdjusting and hedging option tradesExiting options trades automaticallyOptions strategies we don't adjust (and why)Big picture adjustment strategyWhen to adjust or notAdjusting straddles and stranglesAdjusting credit spreads, iron condors, and calendarsSmarter stop-loss ordersBuilding a diversified options portfolioRolling options trades for duration and premiumOptions expiration week position checklistDealing with stock assignment and dividendsHow to free up trading margin and cash
By subject
Options basics
Why options vs. stocks?What is an options contract?Smart use of leverageOption strike priceOption premiumOption expirationOption contract multiplierProfit and loss diagramsLong call option explainedShort call option explainedLong put option explainedShort put option explainedATM, ITM, and OTM optionsCash vs. margin basicsHigh probability trading definedHow to buy a call optionHow to buy a put optionSingle-leg vs. multi-legWhat is the VIX?Is fundamental analysis dead?
Entering and exiting trades
Game of numbers7 step entry checklistStrong liquidity examplesPicking the next directionScanning for tradesOption pricing table basicsSetting up your trade tabPinning your probability of profitUsing delta for probabilitiesBuy to open vs sell to openBuy to close vs sell to closeMarket, limit, stop loss orders5 types of contingent ordersLimit ordersMarket ordersLimit on close ordersMarket on close ordersAdvanced contingent ordersTaking profits before expirationMechanics of rollingConsider future events
Options expiration
Options expiration explainedWhat is the Options Clearing Corporation (OCC)?Physical vs. cash settlement optionsAmerican vs. European style optionsWeekly options expirationWeekly expiration tags/codesOptions assignment processOptions exercise processTrading timeline (duration)
Bullish options strategies
Bull put spreadBull call spreadLong callShort putBull call backspreadPut broken wing butterflyCall calendar spreadPut diagonal spreadCustom naked putCovered callSynthetic long stock
Neutral options strategies
Short straddleLong straddleIron condorsShort strangleLong strangleIron butterflyUnbalanced iron condors
Bearish options strategies
Bear call spreadBear put spreadLong putShort callBear put backspreadCall broken wing butterflyPut calendar spreadCall diagonal spreadCustom naked callCovered putSynthetic short stock
Portfolio managmeent
No guaranteed tradesDon't do something, sit thereAccount size adjustmentsAvoiding stock market overloadStocks, indexes, & ETFsMonitoring positionsCreating automatic alertsIndividual stock betaPortfolio betaBeta weighting your portfolioUncorrelated industries/sectorsSystematic vs. unsystematic riskEfficient portfolio frontierLimiting undefined risk tradesEconomic calendarConcept of legging
Options pricing and volatility
How to find option price quotesUnderstanding the mathIV vs. IV percentileProbability of profit vs. probability of touchOption probability curveBid-ask spread definedIV expected vs. actual moveThe "Greeks"Fatal pricing errorsInverse ETFsOptions parity
Adjusting trades
#1 adjustment for any tradeWhen to adjust a tradeSingle options trade vs. overall portfolioLeveraging the analyze tabCall spread adjustmentsPut spread adjustmentsShort strangle adjustmentsIron condor adjustmentsShort straddle adjustmentsCalendar spread adjustmentsDebit spread adjustmentsButterfly adjustmentsUsing stop lossesDelta hedgingRolling positionsPairs hedging

Strategies
Long callLong putShort callShort putCovered callCovered putProtective putCollar strategyLEAPSBull call debit spreadBear call credit spreadBull put credit spreadBear put debit spreadLong straddleShort straddleLong strangleShort strangleCall calendar spreadPut calendar spreadIron condorReverse iron condorIron butterflyReverse iron butterflyCall butterflyPut butterflyStrapCall diagonal spreadPut diagonal spreadCall ratio spreadPut ratio spreadCall backspreadPut backspreadLong box spreadShort box spreadReversalStock repair

Topics
OverviewAsset allocationAutomated tradingBehavioral financeBrokersCandlestick patternsChart patternsDividendsEconomic indicatorsEquity investmentsExercise & assignmentFinancial analysisFinancial historyFinancial marketsFinancial modelingFinancial theoriesFundamental analysisFuturesInvestment accountsInvestment taxesInvestor biasesMarket holidaysMarket hoursMarket indexesMarket indicatorsMomentum tradingOptionsOptions pricingOptions settlementPortfolio managementRisk managementStocksStock marketTechnical analysisTechnical indicatorsTrading commissionsTrading platformsTrading psychologyTrend trading
Resources

Workshops

Podcast

Blog
Support

Help Center
Overview
Getting started
What is a bot?Creating a botAutomation typesAutomation editorBot dashboardBot positionsBot logTemplates and cloningKey conceptsSafeguards and limitsPower of botsBest practices
Bot automations
What is an automation?Scanner automationsMonitor automationsEvent automationsEditing automationsReusing automationsCopying automationsOrdering automationsUsing custom inputsBot level inputsAutomation statusesAutomations library
Bot actions
DecisionsOpen positionClose positionNotificationsLoop symbolsLoop positionsBot tagsPosition tags
Bot examples
Genesis 1.0 botGenesis 2.0 botGenesis 3.0 botTrend trading with stocks botPortfolio trend trading botTrend trading with options botMultiple moving averages botTechnical swing trading botTrend and momentum botWeekly credit spread botRecurring iron condors botThe "Honey Badger" botHybrid spreads botHigh IV rank iron condor bot
Decision recipes
Comparing underlying symbol priceEvaluating symbol typeComparing underlying symbol propertiesEvaluating underlying symbol performanceEvaluating underlying symbol standard deviationComparing underlying symbol price to an indicatorComparing multiple underlying symbol indicatorsEvaluating underlying symbol implied volatility rankEvaluating underlying symbol earnings reportingEvaluating underlying symbol price probabilityEvaluating underlying symbol probability within rangeEvaluating bot propertiesEvaluating bot available capital for opportunitiesComparing bot position count to position typeComparing bot position count to underlying symbolEvaluating bot position count to position type and underlying symbolEvaluating bot last position activityEvaluating bot last activity with underlying symbolComparing bot active orders statusComparing bot active orders status with underlying symbolEvaluating bot position availabilityEvaluating bot tagsEvaluating opportunity availabilityEvaluating opportunity return expectationsComparing opportunity attributesComparing opportunity leg attributesComparing opportunity bid-ask spreadEvaluating opportunity probabilitiesEvaluating position performanceComparing profit target to trailing valueComparing position time to expirationComparing position durationEvaluating position underlying symbolComparing position propertiesComparing position leg propertiesEvaluating position typeEvaluating position sideComparing underlying symbol price to position legEvaluating position tagsEvaluating underlying symbol indicator propertiesComparing multiple underlying symbol indicator propertiesEvaluating MACD technical indicatorComparing Bollinger Bands to symbol priceEvaluating stochastic technical indicatorComparing VIX propertiesEvaluating market time of the dayEvaluating days of the weekEvaluating bot switches
Position statement
Activity summaryPosition detailsTrade detailsOpened positionsClosed positionsCanceled positionsOverride positionsExpired positionsPosition historyManually open positionManually close positionImport position
Order pricing
SmartPricingFinal price settingsPosition summaryOrder detailsWorking ordersManual override
Bot templates
Creating new templatesUpdating existing templatesDeleting templatesSharing templatesUpdating shared templatesTemplate best practices
Cloning bots
Cloning existing botsCloning from templateCloning from shared template
Troubleshooting
Using bot logsTesting your botsNot enough capital warningDaily position limit warningTotal position limit warningPricing anomaly warningMissing or invalid input errorDaily symbol limit errorExcessive errors failsafeOverlapping strikes failsafePrice exceeds strike-difference errorOptions expiration protocolDuplicate orders errorOptions approval level errorBot event loopsStock splits and corporate actionsSupported browsersSupported countries
Community forum
Community guidelinesCrafting your introductionSending group messagesSending private messagesAttaching bot templatesReceiving bot templatesAttaching automationsReceiving automationsFollowing tradersPosting publiclyEditing posts and messagesSubscribed discussionsUsing bookmarks
Using backtester
Running a new backtestBacktesting results summaryModifying existing backtestsMy backtestsBacktesting research databaseTop backtestsBacktesting errors
Account settings
My profileTrading accountsConnecting to TDAmeritradeConnecting to TradeStationConnecting to TradierIncompatible accountsPassword managementSession timeoutTwo-step authentication
Technical docs
Infrastructure and securityAutomation structureAutomation behaviorData feedsOrder handlingTrade enforcementsBroker rejection errorsBot limitationsProfit and lossFair value pricingDecision propertiesDecision calculationsParameter selectionCalculating probabilityPlatform indicators

Contact
Send FeedbackReport IssueEmail Us
Option AlphaOption Alpha

LoginSignup
ResourcesPodcast

Say Good-Bye to Unlimited Risk Option Strategies Forever

In this podcast I want to conceptually walk through how you can convert unlimited risk strategies into their risk-defined counterparts and limit your exposure.
Say Good-Bye to Unlimited Risk Option Strategies Forever
Kirk Du Plessis
Nov 7, 2017

Unlimited risk option strategies get a bad rap in the investing community among newbie traders. And while our backtesting research has shown that unlimited risk positions like short straddles and short strangles generate the best overall returns, you might be restricted in trading them because of your account type or just fear the big potential drawdowns. In this podcast I want to conceptually walk through how you can convert unlimited risk strategies into their risk-defined counterparts and limit your exposure. As always, there's no free lunch in the market, so if you limit your risk you have to give up something else and we'll discuss the trade-offs on the show together.

Key Points from Today's Show:

  • Unlimited risk strategies have a bad reputation within the industry.
  • Although they seem unlimited, they can be limited by your own position size.
  • Trading multiple positions across multiple ticker symbols is preferred rather than one position across one ETF.
  • Spread your risk and keep your position size down so that no one individual trade can knock you out.
  • Unlimited risk strategies are the most profitable and generate the highest returns with the smoothes portfolio graph of mostly any strategy out there (see show 100).
  • You receive more compensation with unlimited risk strategies, despite the extra risk taken on.

Case Study

IWM is trading at $184.27. We do a regular short strangle in IWM, selling the 139 puts at 15 Delta. On the call side, sell the 15 Delta, which is the 155 alls. You would collect $122 premium to do this. In this case, the margin required is 2,260, which is a given number.

  • Brokers calculate their margin at expected move thresholds that the stock could potentially go in the future.
  • If the stock does make a big move, brokers want to protect themselves against these further STD extremes.
  • Therefore, by using the buying power effect, you can control your risk.
  • The return at expiration, if held for the full period, would be 5.39%.

Risk-Defined Strategy:

If you wanted to do this as a defined risk strategy, simply buy options further out than your short strikes. Use the $122 credit you collected from selling the short strangle to buy options further out. Do a $5 wide spread on either end, buying the $160 calls and selling the $139 puts to buy the $134 puts below the market.

Key: go out as far enough as you feel comfortable with your risk and your position size, to take in enough credit that makes it worth doing.

With a $5 wide spread on either side, credit gets reduced down to $69. This is now where you start to see the trade off, collecting less premium because you are getting a defined risk position. However, in this case it still works out to be a decent setup. The margin that is required to hold this position is just the difference between the strike prices less the premium collect, equalling $435 after commissions.

Return jumps up to 15.86% on this position.

Key: You have to determine whether you are more comfortable collecting less money but having a higher return on your trade.

Iron Condors and Iron Butterflies:

Iron condors and iron butterflies in low implied volatility markets tend to work better because they have higher returns with defined risk and you can effectively create a scenario where you have the same marginable risk as a short strangle and collect way more money in doing so. The only trade off is that your break-even points are much more narrow. This will affect the position in the sense that if the stock starts to move against you, you do not have as much cushion.

With a risk-defined strategy, you will not generally get the quicker profits as you would with a straddle or strangle.

  • Straddles and strangles are just single contracts, trading the short puts and the short calls.
  • As time decay and volatility contracts, those options will see a quicker, more violent reduction in their premium.

Iron Condor Turned Defined Risk:

With an iron condor, when its turned into a defined risk strategy, because you're not selling and buying options at the same time, the premium decays at a much slower pace. Back testing shows that short strangles and short straddles can be held for short periods of time. Therefore you have the ability to potentially recycle that capital at a faster pace. The iron condor has a higher ROI to begin with, but it also means that you have to hold the trade much longer — two or three times longer than the original short strangle.

At this point you can start adjusting your long strikes. If you want to take in the higher credit, go up to the 165 calls with a $10 wide strike on either end. That now moves the credit up to 91 cents from 69 cents. It may not be work going that wide. If you go $10 out on either end and take in credit of $91, the margin required to hold this position after commissions is $913. The return drops down to 9.9%. As you start to replicate more of the original strangle position, you start to see that the return starts to edge down towards the 5.39% original return.

Key Takeaways:

  • No one strategy is better than the other.
  • The key is understanding the tradeoff between the different strategies.
  • Also, be aware that you do not have to do any undefined risk strategies.
  • You can do defined risk strategies if you have a smaller account.
  • By controlling your position size and controlling your risk, you can still generate decent returns along the way.
Strategies
Risk Management
Iron Condor
Iron Butterfly

4.8 (1.1k Ratings)
Subscribe Now

No-code, fully automated trading for stocks and options.

HomeAboutLegalStatusContact
©2022 Option Alpha. All Rights Reserved. Patent Pending USSN 63/118,547