How to Build Spreads with a Minimum Probability of Success

In this video tutorial I want to show you how to build out spreads that have a minimum probability of success before entering the position. There’s a really cool way to use automations in a very simple decision recipe inside any of your scanner automations that you’re running.

Now because we’re going to be looking for an opportunity to enter a position, this again is going to be used mostly inside of your scanner automations. You’re going to want to use these recipes to check the probability of success of a position before you actually go to the next step to place the order with your broker.

Now we’ll assume at this point that earlier in your automation you’ve already made all of the appropriate decisions that would lead you to taking some sort of action on a new position. So, checking your implied volatility rank or your technical indicators or trend, or volume, all of the different decisions that would lead you to this final stage.

Now what you’re going to do is you’re going to add an action down your automation editor that’s going to pull in an opportunity. And in this case, you’re going to pull in an opportunity that is checking a minimum probability of success. This is this recipe here. This is an opportunity recipe because it’s pulling in a potential opportunity and running the values and the metrics around that opportunity before continuing to the next stage where we’ll place the order.

You first have to actually select the opportunity. In this case we’ll just use a short put spread as our main opportunity. You put in all the information for that potential trade including the ticker symbol, and all of the expiration and strikes that you want select for that potential opportunity. Once you’re good to go you simply hit save. That now tells the bot to pull the data on this specific trading opportunity and to run some numbers and calculations on it.

Next, we’re going to go over to the next field here which is the chance of profit. You can also use, of course, the chance of being in the money or the chance of max loss as we’ve shown in other videos. In this case we want to check the probability of success or profit on this position, and make sure that the probability of profit is more than 70% for this particular trade.

We’re going to use 70% because we’re selling around the 30 delta, so we want to make sure that including all the break even prices of our particular position and our implied volatility is right now that there’s a probability of profit on this position more than 70%. Once we’re good to go here we just simply hit save.

That now adds that decision recipe to our automation editor and again it’s going to pull in the values and the matrix for that potential opportunity and make sure that it’s more than 70%. If you find that that opportunity is more than 70% and the answer to that question is yes, you want to go ahead and add an open position action down the yes branch.

So now we’ll add another action to open a position, and you’ll notice that the bots are intelligent enough to pull in the most recent one that you already built out. This means that you don’t have to re-build out it from scratch, you can just use that recent one here. You’ll select that.

Reconfirm all of the information here just one last time, and then go ahead and click save. So, it’s going to pull in some information for potential short put spread in SPY, 30 days out. It’s going to check and see if the chance of profit is more than 70% and then it’s going to go ahead and open that position if the answer to that question is yes.

Notice that we can go right up here on the top and we can actually test this right now in any of our bots. We’ll just use our Macro Trend Bot for testing and we’ll start the test. Now you can see that the test ran all the way through. Currently the short put spread on SPY, 30 days from expiration with a 30 delta and a 10 delta, has a probability of profit more than 70%.

The probability of profit at the exact moment that we just ran this test was 78.75%. So that, in that, our threshold which meant that it could open the position and end the automation. Again, this is just the simple test, but allows you to test your logic and tweak any of these variables or fields to make it exactly what you want before you turn on your bot and start trading live.

So that’s how you use automated probability of success filtering inside of your automations.